IRS Issues Guidance on Taxability of DCAP Benefits for 2021 and 2022
On May 10, 2021, the Internal Revenue Service (IRS) released guidance on the taxability of dependent care assistance programs (DCAPs) for 2021 and 2022, clarifying that amounts attributable to previously issued carryover and extended grace period relief generally are not taxable.
Specifically, if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered employee wages for 2021 and 2022.
IRS Notice 2021-26 also clarifies, using a number of examples, the interaction of this standard with the one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 taxable year under the American Rescue Plan Act.
HSA/HDHP Limits Increase for 2022 – Effective January 1, 2022
On May 10, 2021, the IRS released Revenue Procedure 2021-25 to provide the inflation-adjusted limits for health savings accounts (HSAs) and high deductible health plans (HDHPs) for 2022. Below is a chart reflecting these new amounts.
|
Type of Limit |
2021 |
2022 |
Change |
|
|
HSA Contribution Limit |
Self-only |
$3,600 |
$3,650 |
Up $50 |
|
Family |
$7,200 |
$7,300 |
Up $100 |
|
|
HSA Catch-up Contributions (not subject to adjustment for inflation) |
Age 55 or older |
$1,000 |
$1,000 |
No change |
|
HDHP Minimum Deductible |
Self-only |
$1,400 |
$1,400 |
No change |
|
Family |
$2,800 |
$2,800 |
No change |
|
|
HDHP Maximum Out-of-pocket Expense Limit (deductibles, copayments and other amounts, but not premiums) |
Self-only |
$7,000 |
$7,050 |
Up $50 |
|
Family |
$14,000 |
$14,100 |
Up $100 |
|
Next Steps
Employers that sponsor HDHPs should review their plan’s cost-sharing limits (minimum deductibles and maximum out-of-pocket expense limit) when preparing for the plan year beginning in 2022. Also, employers that allow employees to make pre-tax HSA contributions should update their plan communications for the increased contribution limits.
