Changes to Expect for FSAs in 2017

Flexible spending accounts (FSA) are available to millions of workers and can help them save a bundle on taxes. Every year the amount you contribute toward an FSA can change and give you more opportunities to cut your tax bill. Earlier in 2016, the IRS released Revenue Procedure 2016-55, which raised the health FSA salary reduction contribution limit to 2,600 for taxable years beginning in 2017. There are some key changes to accounts that will take place in the new year. Here are a few changes you can expect in 2017.

Employee Contribution

The amount you are allowed to contribute toward health care expenses is one change you can expect. The amount is tied to inflation, and the maximum contribution limit will have a $50 increase. Contributions to FSAs for dependent care are not tied to inflation and remain the same every year. Limits for dependent care FSAs are $5,000 for everyone, except for those who are married and file separate returns, which have a $2,500 limit. For joint returns, dependent care cannot exceed the earnings of the lower earning spouse. This prevents contributions for workers whose spouses do not have earned income.

The money withheld from paychecks for FSA contributions is on a pre-tax basis. This prevents you from owing income tax on the money taken from your paycheck, a fact that will not change with the incoming new year. Contributions are also exempt from payroll taxes, allowing you to save up an additional seven percent. The health care FSA pre-tax deduction limit is per employee, per employer, per year.

Employer Contribution

As of 2016, if an employer contributes to your health care FSA, you can elect to take the salary reduction maximum and still receive the employer’s contribution. The employee could have more than $2,600 available to reimburse expenses if the employer contributions are part of the plan design. If an employer contribution can be taken as taxable income or cash, the amount is part of the limit. Also, if an employer has adopted the $500 rollover for your health care FSA, any amount that rolls over into the new year plan does not affect the maximum you can make.

An employer, however, is not required to adopt the new health care FSA increase and may keep the maximum at a $2,500 limit in 2017. If an employer wants to take advantage of the new projected increase, an employer is required to amend the new plan. To be on the safe side, it is best to use this year’s FSA contributions before December 31st, so that you don’t risk losing any money.

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