Employees will be able to contribute up to $2,750 to a health flexible spending account (FSA) in 2021, the same as in 2020, the Internal Revenue Service (IRS) announced in Revenue Procedure 2020-45. However, changes were made to certain other benefits thresholds and limits.
The IRS is raising to $235,000 (from $230,000) the annual compensation that makes a company’s employee, other than an officer, a “control employee” for commuting valuation purposes, the IRS announced separately in Notice 2020-79.
For officers, the control employee threshold remains at $115,000. The threshold that defines “highly compensated employee” under Section 414(q)(1)(B) will still be $130,000, and the dollar limit that defines a “key employee” in a top-heavy plan stays at $185,000.
The year 2021 will see higher thresholds for adoption-related tax credits and exclusions. Rev. Proc. 2020-45 raises to $14,440 (from $14,300) the income exclusion and tax credit for qualifying adoption-related expenses. The income threshold at which the credit begins to be phased out now will be $216,660, vs. $214,520 in 2020.
The monthly limits on the qualified transportation fringe benefit, as well as the qualified parking benefit, will still be $270 in 2021. Congress enacted permanent parity between these two in 2015.
Rev. Proc. 2020-45 raises certain long-term care (LTC) insurance premium amounts that will be deductible in 2021. The limit is raised to $450 (from $430) for taxpayers aged 40 or younger, and the amounts increase for the other age groups as well, to a maximum of $5,640 for those older than 70. The per diem limitation on LTC insurance payments also increases, from $380 to $400.
The annual limit on payments and reimbursements under a qualified small employer health reimbursement arrangement is raised to $5,300 for self-only and $10,700 for family coverage, an increase of $50 and $100, respectively, from 2020 levels.
The 2021 contribution limits for health savings accounts (HSAs), along with the adjusted minimum deductibles and maximum out-of-pocket limits for HSA-eligible high-deductible health plans, were announced earlier this year. So was an increase in the permissible FSA carryover amount from $500 to $550.
Social Security Adjustments
The maximum wage base for Social Security tax in 2021 will be $142,800, up from $137,700 in 2020, according to a separate announcement from the Social Security Administration (SSA).
The wage base is the maximum amount of an individual’s gross income that can be subject to Social Security tax on the employer and employee. Employers and employees each pay a FICA tax comprising a Social Security tax of 6.2% on the employee’s earnings up to the wage base, plus a Medicare tax of 1.45% on all earnings. Under the new wage base, the maximum possible Social Security tax will be $8,853.60 (up from $8,537.40 in 2020).
Other changes announced by the SSA include a 1.3% cost-of-living increase in Social Security benefit payments, as well as increases in the retirement earnings test exempt amounts and the Social Security disability thresholds.