Health FSA carryover limit expanded

Tax Hot Topics newsletterThe IRS recently issued Notice 2020-33 to increase the carryover limit (currently $500) for health FSAs. The notice also clarifies that health plans and individual coverage health reimbursement arrangements (HRA) may reimburse health insurance coverage premiums incurred prior to the beginning of a plan year for coverage provided during the plan year.

For health FSAs, the amount that can be carried over from one plan year to the next is increased to an amount equal to 20% of the maximum salary reduction contribution amount for cafeteria plans under Section 125(i) for that plan year. For example, the maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550 (20% of $2,750, the indexed 2020 limit under Section 125(i)).

The plan terms for a health FSA must be amended to reflect the increased carryover limit. Under the general amendment timing rules, an amendment would have to be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of the plan year, provided the employer informs all eligible employees of the changes to the plan. However, the notice includes a special amendment timing rule for the 2020 plan year, which provides that such amendments must be adopted on or before Dec. 31, 2021.

Health plans, including a premium-reimbursement plan in a cafeteria plan or an individual coverage HRA, are also permitted to treat an expense for a health insurance coverage premium as incurred on:
  • The first day of each month of coverage on a pro rata basis
  • The first day of the period of coverage
  • The date the premium is paid

For example, an individual coverage HRA with a calendar plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on Jan. 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.

Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.