The Internal Revenue Service (IRS) released Revenue Procedure 2020-45 on October 26, 2020, which contains the 2021 inflation adjustments for various employee benefit plans, including health care flexible spending accounts, qualified transportation fringe benefits, and adoption assistance programs. This Alert also summarizes other health and welfare benefit plan limits announced earlier this year, and provides a brief summary of changes to the employer shared responsibility penalties under the Affordable Care Act (ACA).
If you have any questions or need further details about the tax limits and how they will affect your employee benefit programs, please contact your account team.
Health & Welfare Plan Inflation Adjustments from Revenue Procedure 2020-45
Each of the limits described below are applicable for taxable years beginning in 2021.
Health Care Flexible Spending Accounts (HCFSAs)
The 2021 HCFSA employee contribution limit is unchanged from 2020, and employees can continue contribute up to $2,750 for plan years beginning on or after January 1, 2021. Employer contributions, if any, do not count against this $2,750 limit.
Note: Earlier this year, IRS Notice 2020-33 adjusted the permitted maximum HCFSA carryover amount to 20% of the current plan year HCFSA annual contribution limit. This replaced the prior fixed $500 maximum carryover limit and means the maximum carryover amount for plan years beginning in 2020 or 2021 is $550 (20% x $2,750).
Qualified Transportation Fringe Benefits
The monthly dollar limit for employee contributions remains $270 per month for the value of transportation benefits provided to an employee for qualified parking. The combined transit pass and vanpooling expense limit also remain $270 per month.
Adoption Credit/Adoption Assistance Programs
In the case of an adoption of a child with special needs, the maximum credit allowed under Code Section 23 increases to $14,400. The income threshold at which the credit begins to phase out increases to $216,660. Similarly, the maximum amount that an employer can exclude under Code Section 137 from an employee’s income for adoption assistance benefits increases to $14,400.
Other Health and Welfare Plan Limits
In May, the U.S. Department of Health & Human Services (HHS) released its Notice of Benefit and Payment Parameters for 2021, and the IRS released Revenue Procedure 2020-32. These two releases contain the 2021 inflation adjustments for non-grandfathered health plans subject to the ACA, high- deductible health plans (HDHPs), and health savings accounts (HSAs). For comparison purposes, the 2020 and 2021 limits are below:
|Item||2020 Self-Only / Family||2021 Self-Only / Family|
|Out-of-Pocket Maximum Limit1||$8,150 / $16,300||$8,550 / $17,100|
|HDHP and HSA Annual Limits|
|Item||2020 Self-Only / Family||2021 Self-Only / Family|
|HDHP Minimum Statutory Deductible||$1,400 / $2,800||$1,400 / $2,800|
|HDHP Out-of-Pocket Maximum Limit||$6,900 / $13,800||$7,000 / $14,000|
|HSA Annual Maximum Contribution||$3,550 / $7,100||$3,600 / $7,200|
|HSA Catch-Up Contribution ( ≥ age 55)||$1,000||$1,000|
Increases to ACA Employer Mandate Penalties
Section 4980H Penalties
The ACA’s employer shared responsibility mandate requires Applicable Large Employers (ALEs) to offer medical coverage to their full-time (FT) employees in order to avoid potential penalties.
- The Section 4980H(a) penalty (the “no offer” penalty) – This penalty is triggered when an ALE fails to offer minimum essential coverage to at least 95% of its FT employees, and at least one FT employee receives a subsidy in the Public Health Insurance Marketplace. The no offer penalty calculation is:
(The ALE’s total number of FT employees – 30) × the 4980H(a) penalty amount
- The Section 4980H(b) penalty (the “inadequate offer” penalty) – This penalty is triggered when an ALE offers minimum essential coverage to at least 95% of its FT employees but fails to offer affordable and/or minimum value coverage to a FT employee who receives a subsidy in the Public Health Insurance Marketplace. The inadequate offer penalty is limited to the FT employees actually receiving subsidies.
The IRS announced the 2021 penalty amounts in its Employer Mandate FAQs, Q/A #55. For comparison purposes, the 2020 and 2021 affordability safe harbor percentages and penalties are below.
|Plan year beginning on or after||Section 4980H(a) Penalty||Section 4980H(b) Penalty||Affordability Safe Harbor %|
|January 1, 2020||$214.17/month $2,570/year||$321.67/month $3,860/year||9.78 %|
|January 1, 2021||$225.00/month $2,700/year||$338.33/month $4,060/year||9.83 %|
Failure to Report Penalties
Revenue Procedure 2020-45 also includes small increases to the penalties for failing to timely file Forms 1094/1095 with the IRS and/or deliver Forms 1095 to required individuals.
The information contained herein is for general informational purposes only and does not constitute legal or tax advice regarding any specific situation. Any statements made are based solely on our experience as consultants. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. The information provided in this alert is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients. This is not legal advice. No client-lawyer relationship between you and our lawyers is or may be created by your use of this information. Rather, the content is intended as a general overview of the subject matter covered. This agency is not obligated to provide updates on the information presented herein. Those reading this alert are encouraged to seek direct counsel on legal questions. © 2020 Marsh & McLennan Agency LLC. All Rights Reserved.