The Affordable Care Act put a cap on the maximum contribution employees can make to health flexible spending accounts, which is indexed to the consumer price index. The cap is likely to increase by $50, explains Rich Stover, principal at Xerox HR Services, but the Internal Revenue Service won’t officially release that until mid-October or November. EBA spoke with Stover to find out what actions advisers and employers should be taking to be ready now.
EBA: What may be changing with FSAs?
Stover: One of the provisions of the Affordable Care Act to help raise revenue to pay for aspects of the Act was a cap on the amount employees could put into a flexible spending account. That started in 2014. What the law does is it indexes that cap based on the medical component of the Consumer Price Index. What is happening, based on that indexing that is used, the cap will increase next year. It did not increase last year, but inflation has been high enough that the cap will go up by $50.
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EBA: When will these new regulations come out? How can you plan when open enrollment could be over when they are released?
Stover: It makes it difficult and delays for employers the ability to increase the cap. They are constrained by the law and the IRS process. The law itself follows the indexing period, so the index period that is used is CPI through August. Our projection was using CPI through July. There is no way in the world that CPI can flop enough, unless we have a catastrophic event in the next few days, for a rise not to happen.
The August CPI isn’t available until mid to late September. CPI is used by the IRS for quite a few provisions, many of the retirement side. The IRS for September performs their final analysis and prepares a release toward the end of October.
For health plans, it is too late if employers are going to wait for that official word. I do have clients who are increasing their limits. The confidence is the limit will in fact go up. Some other employers will leave it at $2,550. Others will go back to employees after open enrollment and tell them they can put in an additional $50.
EBA: What should employers know?
Stover: Know that it is going to increase. What will quite often happen is in October and November, right after open enrollment, an employee will come back and say, ‘Wait a minute, how come you only let me put in $2,550 when the IRS says it is now $2,600?’ Employers should be aware that the amount is going to increase and be prepared for the decision and questions from employees. Most employers are going to leave it at $2,550 and not increase until some next year.
EBA: Does an employer have to increase the limit?
Stover: No, they don’t have to increase it; you can have a lower limit. But, some employers the way they set up their plan is they say for their FSA, it is the maximum amount allowed will be the max allowed under the IRS guidance. If they have written their plan that way, in a sense, it forces them to increase. That is an employer decision, there is no requirement.
EBA: What should advisers know?
Stover: Let the clients know that it looks like that level is going to increase and have the employer strategize on what, if any, action they want to take. One client I spoke with, who has not going through open enrollment yet, is going to allow the $2,600.
Employers need to decide what, if any, action they are going to take because of this increase. For many employers, it is only $50, more work than it is worth to try to change it now, so most employers are going to wait to increase it for 2018 calendar year.
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Advisers should let them know, before somebody else does. At least advise them the cap is going up and what type of action they should consider, or be prepared for employee questions. Once the IRS official announcement comes out there will be a significant amount of press and employees might be asking, ‘How come we can’t do $2,600?’
