The IRS recently announced changes for HDHPs for 2021, along with more flexibility for other employee saving accounts.
Here's what you need to know:
- Contribution limits, out-of-pocket expenses, annual deductibles, and catch-up contributors are a part of HDHP changes for 2021
- The IRS also announced they would allow more flexibility for other employee saving accounts
- FSAs are a win-win for businesses and employees: employees can reduce their annual tax burden and employers can save on payroll taxes and FICA contributions
The Internal Revenue Service released its 2021 adjustments for Health Savings Accounts (HSAz) in a May 21, 2020 publication. They outline a modest increase in contribution amounts allowed to employees for the coming year. They also provide some adjustments in deductibles and out-of-pocket maximums for the plan year.
For employers who sponsor high deductible health plans, the IRS is making changes well in advance to give businesses time to prepare for the increases. These changes only apply for employees enrolled in HDHPs at this time.
Changes effective January 1, 2021:
For employees who carry single HDHP coverage, the maximum annual contribution has increased $50 (up from $3,550) to $3,600 for 2021.
For family coverage under a HDHP, the new maximum contribution allows a $100 increase (up from $7,100) to $7,200 for 2021.
Out-of-pocket expense changes
To be eligible for the increased allowance into the employees’ healthcare savings plan, the employer-sponsored HDHPs must meet IRS thresholds.
Annual out-of-pocket expenses will also increase for 2021. These are costs the employee incurs that are not under the health plan, including eligible dental and vision expenses.
To be eligible for the increased allowance into the employees’ healthcare savings plan, the employer-sponsored HDHPs must meet IRS thresholds. They define an HDHP as one that carries a minimum annual deductible as well as a maximum out-of-pocket contribution. To meet the guidelines, changes for 2021 include:
- Single coverage minimum $1,400 per year (no change from 2020)
- Family coverage minimum $2,800 per year (no change from 2020)
Maximum out-of-pocket expenses
- Single coverage maximum $7,000 per year (increase of $250 over 2020)
- Family coverage maximum $13,800 per year (increase of $200 over 2020)
For workers aged 55 or older who are adding “catch-up” contributions, there will be no change to the additional $1,000 they can contribute to their accounts for 2021. Remember the employee has to be either 55 when declaring their contribution or turning 55 during the plan year.
Other spending account changes
In addition to changes for HDHPs for 2021, the IRS recently announced they would allow more flexibility for other employee saving accounts. The newest changes include letting employees make adjustments to their current dependent and healthcare account deposits in response to the COVID-19 outbreak.
New mid-year enrollments are being allowed for 2020, even if the employee has not experienced a qualifying event. Employees are also allowed, during the pandemic rule change, to shift the amounts they’ve contributed to existing accounts.
Time to start FSAs in your company
Employers who have existing flexible spending accounts available to staff members reap the benefits. For those who don’t, now may be the time to consider offering them. FSAs, either for health or dependent care expenses, provide staff members the chance to reduce their annual tax burden and set aside funds to cover costs for childcare and dependent care under Dependent Care Spending Accounts and/or healthcare costs under HSAs. The savings can be significant with regard to their tax liability. In addition, employees have a fund they can pull from to cover expected or unexpected expenses they incur during the year.
FSAs, either for health or dependent care expenses, provide staff members the chance to reduce their annual tax burden.
For businesses, the cost of administering these accounts is minimal, but the tax incentives are great. Remember your staff members are setting aside pre-tax dollars into their accounts. This means employer contributions of payroll taxes are reduced by every dollar an employee sets aside in their account. Even the smallest of businesses benefits.
For every dollar your employees save, you also see savings in your payroll tax and Federal Insurance Contributions Act contributions. FSAs are a win-win for businesses and employees. The changes being made for 2020 and 2021 represent a great opportunity for companies and workers to enroll in these plans.