@sjh518 wrote:
Thank you for your reply. However, can you provide the applicable reference to IRS publications or other authoritative literature that supports your answer? Everything I find seems to say the limit is calendar year or is silent in explaining "plan year." I have asked some benefits managers and they are stumped, mostly because they have calendar year plans and did not have to address it.
Thank you.
I was incorrect. The situation is complex, and I may not entirely understand the IRS documents. Try the official IRS notice here,
https://www.irs.gov/pub/irs-drop/n-21-26.pdf
and this article from a law firm explaining it,
https://www.dickinson-wright.com/news-alerts/moore-irs-clarifies-treatment-of-dependent
There are two concepts that seem like they should be the same but are actually completely different. What can you elect to contribute to the plan, and how much benefit (reimbursement) can you actually exclude from income on your tax return. You may be in a situation where you can contribute more than you can exclude, which means that part of your benefit gets added back to your taxable income. (There is no additional penalty for this, and because your FSA is also excluded from social security tax and you don't have to pay that if the benefit is taxable, you still come out slightly ahead. But it's complicated.)
The exclusion limit on your tax return is $10,500 for calendar year 2021 and $5000 for calendar year 2022, even though your employer can allow you to contribute up to $10,500 for a plan that spans those years.
The ultimate excludability seems to involve both 2021 and 2022 limits and how you used your benefits. See examples 2 and 3 in the IRS notice.
What matters on your tax return is not contributions, but reimbursements. Your employer will certainly allow you to elect to contribute up to $5000 for your plan year that starts July 1, 2022, but whether you will actually be able to exclude that from income is questionable. You may be limited to an exclusion on your 2022 tax return of $5000, meaning that any extra benefits you used would be added back to your taxable income (there is no penalty, however). Under those circumstances, it seems likely that you will want to avoid taking reimbursements from your 2022 plan until after Jan 1, 2023, which makes it a carryover that will be excludable in 2023 rather than 2022. But that will also depend on the 2023 carryover rules.
For your 2021 tax return, you got reimbursed whatever you got, and it's too late to change it. Your tax return will be whatever it will be. Any amount remaining in your account is not a carryover, because you are still in the middle of your plan year. When it comes to your benefits election for the 22-23 plan year starting July 1, 2022, how much you can or should elect to contribute will depend on your remaining balance from the 21-22 plan year (if any) and the details of any grace period your plan offers.
I would focus on 2021 for now, and ask back when your benefits election is closer to the deadline so we can re-analyze the situation.
