This afternoon the IRS officially announced the final 2020 election/contribution limits for Flexible Spending Accounts (FSAs), qualified Commuter Benefits, and several retirement savings vehicles. (See comparison tables, below.)
Considering that many employers have already held their employee benefits Open Enrollments for 2020, today’s announcements by the IRS can best be filed under the “better late than never” category.
These IRS statements finally set official contribution limits for Health Care FSAs, Dependent Care FSAs, Limited Purpose FSAs, Qualified Parking and Qualified Transportation Saving Plans, 401(k)s, 403(b)s, most 457 plans, IRAs, SIMPLE Plans, and the Federal Government’s Thrift Savings Plan.
All of these saving plans provide participants with the opportunity to save money, either by paying for qualified expenses with pre-tax savings contributions, or by saving for retirement with pretax elections.
Flexible Spending Accounts and Commuter Benefits
Beginning January 1, 2020, the maximum employee contribution amounts for FSAs and Commuter Benefits will be as follows;
Health Savings Accounts and High Deductible Health Plans
Separate from today's announcement and earlier this year, the IRS announced inflation-adjusted contribution limits to Health Saving Accounts (HSAs) for 2020. Since employers can also contribute to HSAs, note that the limits listed below are combined totals for both employer and employee contributions.
The IRS also previously issued inflation-adjusted minimum deductibles and maximum out-of-pocket limits for Qualified High Deductible Health Plans (HDHPs). They are as follows;
Note that while most HDHPs allow for maximum contributions limits, not all do. If an employer’s plan sets a limit less than the maximum, it will likely remain unchanged.
In the same announcement earlier today, the IRS also issued other important contribution limits for many retirement plans. For 2020, these limits are as follows;
In total, those looking to save aggressively towards retirement will be able to stash away as much as $33,000 in these tax-advantaged accounts come January 1, 2020. And if an employer allows after-tax contributions or someone is self-employed, they can save an even greater amount.
While maxing out retirement plan savings may sounds unlikely, according to Vanguard’s How America Saves report, 13% of employees with retirement plans at work maxed out their savings caps in 2018. And in plans offering catch-up contributions, 15% of those who qualified to participate took advantage of this extra savings opportunity last year.
Managing These Changes
Note that changes to contribution levels into HSAs, 401(k)s and transportation and commuter benefits can be made any time during the year, not just during Open Enrollment or after a Qualifying Life Event (QLE), the latter of which triggers a Special Enrollment Period (SEP).
Contributions to FSAs, on the other hand, follow the “use-it-or-lose-it” rule, whereby changes to contribution limits after Open Enrollment aren’t allowed.
Employers who have already completed Open Enrollment for 2020 therefore have two choices; 1) They can do nothing, since there isn't an obligation to make the maximum election amounts available to employees, or 2) They can reopen the enrollment process and let employees who want to increase their elections do so before December 31st (for calendar year plans).
Note that employers who chose to increase contribution limits need to also make sure they are updating their plan documents accordingly.
If you have any questions about this year’s IRS limits as they relate to these or other employee benefits, contact us, or reach out to your employee benefits advisor right away.
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