A summary of 2022 health and welfare limits and other annual adjustments

The Internal Revenue Service (IRS) released Revenue Procedure 2021-45 on November 10, 2021, which contains the 2022 inflation adjustments for various employee benefit plans, including healthcare flexible spending accounts (HCFSAs), 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

As expected, the 2022 HCFSA employee contribution limit increased slightly from 2021 by $100. Employees can contribute up to $2,850 for plan years beginning on or after January 1, 2022. Employer contributions, if any, do not count against this $2,850 limit.

We provide a comparison of FSA limits for 2021 and 2022 below.

Note: IRS Notice 2021-15 enables employers to allow unlimited carryovers for both types of FSAs from plan years ending in 2021 to plan years ending in 2022. An unlimited carryover does not count toward the next year’s contribution limit, and this is also true for amounts remaining available in a subsequent plan year due to an extended grace period. An employer may adopt an unlimited carryover or an extended grace period, but it cannot adopt both for the same FSA.

Qualified Transportation Fringe Benefits

The monthly dollar limit for employee contributions increased to $280 per month for the value of transportation benefits provided to an employee for qualified parking. The combined transit pass and vanpooling expense limit also increased to $280 per month.

Adoption Credit/Adoption Assistance Programs

In the case of an adoption of a child, the maximum credit allowed under Code Section 23 increases to $14,890. Similarly, the maximum amount that an employer can exclude under Code Section 137 from an employee’s income for adoption assistance benefits increases to $14,890. The income threshold at which the credit (and income exclusion for employer provided benefits) begins to phase out increases to $223,410 and is completely phased out for taxpayers with modified adjusted gross incomes of $263,410 or more.

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 2022, and the IRS released Revenue Procedure 2021-25. These two releases contain the 2021 inflation adjustments for non-grandfathered health plans subject to the ACA, qualified high-deductible health plans (HDHPs), and health savings accounts (HSAs). For comparison purposes, the 2021 and 2022 limits are below:

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) employees2 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 for a month, and at least one FT employee receives a subsidy in the Public Health Insurance Marketplace (Marketplace). The “no offer” penalty calculation is:

(The ALE’s total number of FT employees – 30) × 4980H(a) penalty amount3

• 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 Marketplace. The inadequate offer penalty is limited to the FT employees actually receiving subsidies.

The IRS announced the 2022 penalty amounts in its Revenue Procedure 2021-36. For comparison purposes, the 2021 and 2022 affordability safe harbor percentages and penalties are below.

Failure to Report Penalties

Revenue Procedure 2021-45 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 ($290 per return if not filed by August 1, 2023).