If you sponsor a cafeteria plan (IRC § 125 plan) with a Medical FSA feature, year-end enrollments will be starting soon, so your employees will be interested in this increase.

In Revenue Procedure 2014-61 released on October 30, 2014, the IRS announced the increase in the amount that may be deducted from an employee’s paycheck for  Medical FSA’s.  The limit for years beginning in 2015 will be $2,550, which is an increase of $50 from the previous limit of $2,500.  There was no change in the limit on Dependent Care FSAs, that limit remains $5,000.

Originally, IRS Notice Notice 2012-40 set the limit at $2,500 for Medical FSA’s for plan years beginning on or after January 1, 2013 noting the amount may be indexed in future years for inflation.

The maximum amount remained $2,500 for 2014. 2015 will be the first year the amount has been indexed for inflation.  The maximum amount that may be deducted also applies to limited purpose FSA’s.

Your contributions that are not able to be cashed out as taxable income are not counted towards the $2,550 limit however, you will want to be sure any of your contributions meet the necessary criteria so the Medical FSA remains an excepted benefit.

Amounts counted towards rollover or grace period funds do not count towards the maximum amount of $2,550. This same time last year, the IRS modified the Use-it-or-Lose-it Rule that allows certain amounts left in Medical FSAs at the end of the year could be used in the following year provided your plan includes (or is amended) to allow one of the carryover methods as follows: Plans can choose between the rollover of up to $500 of unused funds to the next plan year, or allow participants up to two and a half (2½ ) months from the end of the plan year to incur expenses against unused funds from the prior plan year.