On October 25, 2016, the Internal Revenue Service (IRS) announced via Revenue Procedure 2016-55 the dollar limitation on employee salary reductions for contributions to health flexible spending accounts; the monthly limitations regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass and the fringe benefit exclusion amount for parking; and the maximum amount that can be excluded from an employee’s gross income for the amounts paid for qualified adoption expenses furnished pursuant to an adoption assistance program.
Health Flexible Spending Accounts
The 2017 maximum employee salary reduction contribution to a health flexible spending account will increase to $2,600. This is a $50 increase from the 2016 limit of $2,550. The Affordable Care Act (ACA) had limited employee salary reductions for contributions to health flexible spending accounts to $2,500 per employee, but allowed that the limit may be adjusted annually for inflation in increments of $50.
The $2,600 limit applies to both full-purpose and limited-purpose health flexible spending accounts. However, an employer is not required to adopt the maximum amount allowed in its plan design and may choose to allow an amount less than $2,600. The $2,600 limit applies only to employee salary reduction contributions during the benefit plan year and does not impact employer-paid contributions or, if offered, contributions made as a result of the balance carryover option. If an employer provides flex credits that employees may elect to receive either as cash or as a taxable benefit, those flex credits are treated as employee salary reduction contributions and count toward the $2,600 limit.
The dependent care spending account maximum is set by statute and is not subject to inflation-related adjustments. Consequently, the 2017 dependent care spending account maximum continues to be limited to the smallest of the following amounts:
- $5,000 if the employee is married and filing a joint return or if the employee is a single parent ($2,500 if the employee is married but filing separately);
- the employee's “earned income” for the year; or
- the spouse’s “earned income,” if the employee is married at the end of the taxable year.
Qualified Transportation/Parking Benefits
Transportation
The monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass remains at $255 for 2017.
Parking
The monthly limitation regarding the fringe benefit exclusion amount for qualified parking remains at $255 for 2017.
Adoption Assistance Programs
The maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee in 2017 is $13,570. This is an increase of $110 over the 2016 maximum.
Summary of Changes to 2016 Contribution Limits
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2016
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2017
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Health Flexible Spending Accounts
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$2,550/plan year
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$2,600/plan year
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Dependent Care Spending Account
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Smallest of the following amounts:
· $5,000 if the employee is married and filming a joint return or if the employee is a single parent ($2,500 if the employee is married but filing separately);
· the employee’s “earned income” for the year; or
· the spouses “earned income” if the employee is married at the end of the taxable year.
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Smallest of the following amounts:
· $5,000 if the employee is married and filming a joint return or if the employee is a single parent ($2,500 if the employee is married but filing separately);
· the employee’s “earned income” for the year; or
· the spouses “earned income” if the employee is married at the end of the taxable year.
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Qualified Transportation
Parking Benefits
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$255/month
$255/month
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$255/month
$255/month
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Adoption Assistance Program
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$13,460/year
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$13,570/year
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For a copy of Revenue Procedure 2016-55 please click here.