Health FSA and Transportation Fringe Exclusion Maximums Rise for 2024

Closely following the IRS’s announcement of 2024 inflation-adjusted limits for retirement plans (Notice 2023-75), the IRS also has announced its 2024 inflation-adjusted limits for health FSAs, qualified transportation fringes, income tax rates, and other indexed amounts under the IRC. Review the new limits here, as well as the updated qualified transportation fringe exclusion for pre-tax employee savings or nontaxable employer payments toward qualifying employee transportation costs. The revenue procedure also announces indexed limits for 2024 individual income tax rates, the standard deduction, the long-term capital gains rate, and other amounts.

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• Cafeteria Plan Design and Compliance (IRC 125)
  Remember that an FSA must satisfy all the requirements of a cafeteria plan, including the prohibition against deferring compensation, so the use-it-or-lose-it rule applies. Two exceptions exist allowing unused health FSA balances to carry into the next year: (1) a cafeteria plan can permit a grace period to apply, so unused health FSA amounts at year end can be spent on next year’s allowable expenses, incurred from January 1 through March 15, for calendar year plans (I.R.S. Notice 2005-42), and (2) an indexed dollar carryover is permitted in a health FSA to carry and be used for the whole of the next taxable year (I.R.S. Notice 2013-71). That carryover limit is $640 for 2024 per Rev. Proc. 2023-34 (i.e., $640 of an individual’s unused health FSA balance on December 31, 2024, can be carried to the 2025 plan year). The limit is $610 for 2023. The plan can only permit use of one method. 

DID YOU KNOW? In its e-news for tax professionals, IRS says: “If your clients approach you for advice about participating in an abusive tax scheme, use the information outlined in the revised Publication 3995, Recognizing Illegal Tax Avoidance Schemes, to help them recognize and avoid fraudulent acts. Publication 3995 explains common tax avoidance schemes and provides instructions for reporting abusive tax schemes to the IRS Lead Development Center.”

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