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In Revenue Procedure , the IRS sets forth a variety of 2022 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health flexible spending arrangements (FSAs) and qualified transportation fringe benefits will increase slightly for 2022.

• The limit on annual employee contributions toward health FSAs for 2022 is $2,850, with the ability to carryover up to $570.
• The limit on monthly contributions toward qualified transportation and parking benefits for 2022 is increased to $280.

Health FSAs

The annual contribution limit of $2,850 for health FSAs applies specifically to employee contributions: The same limit applies for general-purpose and limited-purpose health FSAs. Employer contributions are not subject to the limit, but are subject to different restrictions under other rules.

Employee health FSA contributions subject to the $2,850 annual limit include:

1. Amounts deducted pre-tax from an employee’s compensation through a cafeteria plan; and
2. Employer flex credits that the employee has the option to use toward cash or other taxable benefits.

Employees may elect up to $2,850 even if they’ve carried over up to $550 from the previous plan year. In addition, employees who join mid-plan year may still elect up to $2,850 for the remainder of the plan year. The limit applies per employee, rather than on a household basis, so if both spouses are employed and eligible for health FSA coverage, each spouse could contribute up to $2,850 for 2022. Finally, the limit applies on a per employer basis so long as the two employers are unrelated (i.e., not part of a controlled group or affiliated service group due to common ownership or shared services). In other words, an individual eligible for a health FSA under two separate employers, whether simultaneously or at different times during the same plan year, may elect up to $2,850 under each employer’s health FSA so long as the two employers are not part of a controlled group or affiliated service group.

Employer health FSA contributions may be made in addition to the $2,850 allowed for employee contributions. However, a health FSA must satisfy the following two conditions in order to meet “excepted benefit” status and avoid violating health care reform requirements:

• Maximum Benefit Condition. The maximum employer contribution to the health FSA of any participant cannot exceed the greater of:
  1. (i) 1x the participant’s salary reduction election; or
  2. (ii) $500.
  • In other words, the employer can contribute up to $500 safely to anyone’s FSA even if the employee contributes little or nothing, or the employer can contribute up to a 1-to-1 match of the employee’s contribution (e.g., if matching at the maximum 1-to-1 ratio, then the employer could contribute up to $2,850 to the health FSA of someone contributing $2,850 from their own paychecks for 2022, giving them a maximum FSA of $5,700).
• Availability Condition. The health FSA should only be available to employees that are eligible for the employer’s other non-excepted group health plan coverage (e.g., major medical coverage).
  • So those eligible for the FSA must be eligible for the group medical plan (but they do not have to be enrolled in it in order to enroll in the FSA).

The combination of employee and employer contributions elected for the plan year must be made available throughout the plan year to reimburse qualifying medical expenses, even if the amounts have not yet been contributed (the “uniform coverage” rule). If an employee exhausts the funds and then terminates participation mid-plan year, the employer cannot request repayment. However, if the employee does not incur enough expenses during the plan year to exhaust the amounts contributed, the employee will forfeit the remaining balance (the “use-or-lose” rule) subject to any grace period or carryover provision in place for the plan. Plans can have up to a 2 1/2-month grace period or carryover of up to $570, but never both.

NOTE: The extended grace period (up to 12 months) and expanded carryover (uncapped) made available as COVID relief are limited to plan years ending in 2020 and 2021.�� Employers with a plan year ending on/before 12/31/21 should evaluate whether they will honor the more generous terms one last time.

Qualified Transportation Fringe Benefits (Transportation & Parking)

Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The $280 monthly limit applies separately to: (a) qualified parking; and (b) the combination of commuter highway vehicles and transit passes.��An employee could elect up to $560/month to use toward a combination of transportation and parking benefits. For qualified transportation fringe benefits, both employee and employer contributions count toward the monthly limit.

Just as contribution limits apply monthly, employees generally have the opportunity to change elections monthly (or even more frequently). Unused contributions cannot be cashed out, but they can be used in subsequent months. So if an employee fails to use all amounts contributed for qualified transportation or parking benefits and then terminates coverage, the leftover amounts would be forfeited. But if the employee continues participation in the plan, and perhaps reduces contributions for future months, unused amounts from one month may be used for coverage in later months (up to $280 in any given month).

	Health FSA or Limited Purpose FSA Employee Contribution Limit	Health FSA Carryover Limit (employer could allow all unused funds from plan year ending in 2021 to carryover to 2022 under COVID relief)	Monthly Commuter Plan Limit (full limit allowed for qualified parking separately from commuter highway vehicle/transit passes)
2020	$2,750	$550 into 2021	$270 ($540 for both)
2021	$2,750	$550 into 2022	$270 ($540 for both)
2022	$2,850	$570 into 2023	$280 ($560 for both)

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IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.