IRS Releases 2021 Cost-of-Living Adjustments for Health FSAs, Transportation Benefits, Adoption Assistance, and More

The IRS has released the 2021 cost-of-living adjustments (COLAs) for a wide variety of tax-related limits, including limits relating to health FSAs, qualified transportation fringe benefits, qualified small employer health reimbursement arrangements (QSEHRAs), adoption assistance, DCAPs, the small business health care tax credit, the premium tax credit, and Archer MSAs.

• Health FSAs. For 2021, the dollar limit on employee salary reduction contributions to health FSAs will remain at $2,750.
• Qualified Transportation Fringe Benefits. The monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits will remain at $270. The combined monthly limit for transit passes and vanpooling expenses will remain at $270.
• QSEHRAs. The maximum amount of payments and reimbursements under a QSEHRA will be $5,300 for self-only coverage and $10,700 for family coverage (up from $5,250 and $10,600, respectively).
• Adoption Assistance Exclusion and Adoption Credit. The maximum amount that may be excluded from an employee’s gross income under an employer-provided adoption assistance program for the adoption of a child will be $14,440 (up from $14,300). In addition, the maximum adoption credit allowed to an individual for the adoption of a child will be $14,440 (up from $14,300). Both the exclusion and the credit will begin to be phased out for individuals with modified adjusted gross incomes greater than $216,660 and will be entirely phased out for individuals with modified adjusted gross incomes of $256,660 or more.
• DCAPs. While the $5,000/$2,500 DCAP limit has not changed (it is a non-indexed limit), there are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2021 tax rate tables, earned income credit amounts, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.
• Small Business Health Care Tax Credit. The average annual wage level at which the tax credit begins to phase out for eligible small employers will be $27,800 (up from $27,600). The maximum average annual wages to qualify for the credit as an “eligible small employer” will be twice this amount, i.e., $55,600.
• Premium Tax Credit. For taxable years beginning in 2021, the following limitations on the tax for excess advance credit payments will apply: For unmarried individuals (other than surviving spouses and heads of household), $325 for household income less than 200% of the federal poverty line (FPL); $800 for household income at least 200% but less than 300% of FPL; and $1,350 for household income at least 300% but less than 400% of FPL. For all other taxpayers, $650 for household income less than 200% of FPL; $1,600 for household income at least 200% but less than 300% of FPL; and $2,700 for household income at least 300% but less than 400% of FPL. This tax is imposed if a taxpayer’s advance premium tax credit payments for health insurance purchased through an Exchange for a year exceed the allowed credit. (For 2021 indexing adjustments used to determine an individual’s premium tax credit and whether an individual is eligible for affordable employer-sponsored minimum essential coverage, see our Checkpoint article).
• Archer MSAs. For Archer MSA-compatible high-deductible health coverage, the annual deductible for self-only coverage must not be less than $2,400 (up from $2,350) or more than $3,600 (up from $3,550), with an out-of-pocket maximum of $4,800 (up from $4,650). For family coverage, the annual deductible must not be less than $4,800 (up from $4,750) or more than $7,150 (up from $7,100), with an out-of-pocket maximum of $8,750 (up from $8,650).

Other 2021 limits with benefit implications include the thresholds for determining who is a “control employee” under the commuting valuation rule (announced in IRS guidance on other limits—see our Checkpoint article), and the limits on the long-term care premiums that will be considered medical care under Code § 213(d) (which have been adjusted for 2021). Some of the penalty amounts applicable to information returns and individual statements (including Forms 1094 and 1095) have also been adjusted.

EBIA Comment: Sponsors and administrators of benefits with limits that are changing will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees. Note that the Archer MSA pilot program expired at the end of 2007, which means that no new Archer MSAs can be established after that date. Many who previously had Archer MSAs have switched to HSAs, which are generally more favorable. (For the 2021 COLAs for HSAs, see our Checkpoint article.) For more information, see EBIA’s Cafeteria Plans manual at Sections XIX.F (“Limitation on Health FSA Salary Reductions”) and XXIII.C (“DCAP Participation vs. Claiming the Dependent Care Tax Credit”); EBIA’s Fringe Benefits manual at Sections III (“Qualified Adoption Assistance Programs”) and XX (“Qualified Transportation Plans”); EBIA’s Consumer-Driven Health Care manual at Sections XXVII.C (“QSEHRA Reimbursements, Benefit Limits, and Funding”) and XXXI (“Archer MSAs”); and EBIA’s Health Care Reform manual at Sections XXVI (“Small Business Health Care Tax Credit”) and XXI.G (“Premium Tax Credits”).

Contributing Editors: EBIA Staff.