Employee contribution limits will remain unchanged next year. The IRS isn’t increasing employee contribution limits for 401(k)s or flexible spending accounts for 2021.
Limits will remain the same with employees being able to defer up to $19,500 into a 401(k), 403(b) and most 457 plans at work. The limits also remain the same for employee catch-up contributions for those 50 and older, at $6,500. Last year saw a $500 jump in the overall employee contribution limit for 2020 plus a $500 rise in the catch-up limit.
For 2021, the dollar limit for employee contributions to flexible spending accounts, made pretax through salary reductions, remains unchanged at $2,750. However, for health FSA plans that permit the carryover of unused amounts, the maximum carryover amount for 2021 is $550, an increase of $50 from the original 2020 carryover limit.
Thresholds are adjusted annually for inflation and are usually announced around the time when employees are enrolling in benefits.
The IRS released 2021 health savings accounts limits back in May. The annual limit on deductible contributions to an HSA will jump by $50 for individuals and $100 for families next year. In 2021, the annual HSA contribution limit will rise to $3,600 for individuals in a high-deductible plan. That’s up from $3,550 in 2020. Those with family plans will be able to stash up to $7,200 in 2021—up from $7,100 in 2020. Account holders who are older than 55 can save an extra $1,000 annually as a catch-up contribution.
Although employee contribution limits for 401(k)s and FSAs are the same, HR managers should still make sure to convey the limits to workers for next year. Many industry insiders say employers should encourage employees to fund their 401(k)s to the best of their ability. Contributing to retirement accounts—and increasing contributions over time—is important to long-term savings, even during market volatility.
“It’s good guidance for employers to tell workers that any savings they can do today will have an outsize benefit, and it’s important [employees] exercise their option to contribute to this employer plan,” Edward Gottfried, group product manager for Betterment for Business, a provider that works with 500 employer clients.
“One thing we talk about a lot is [employees should] save as much as [they] can comfortably allow, and even push that a little bit. As your level of comfort shifts, it can be necessary or appropriate to shift [contributions] down a little bit, but it’s really important to still contribute, even if it’s at a slightly lower rate than it might have been at other times.”
The CARES Act Expands HSA-Eligible Purchases
As part of the Coronavirus Aid, Response and Economic Security (CARES) Act signed into law at the end of March, account holders can now use HSAs, health reimbursement arrangements (HRAs) or health flexible spending account (FSAs) to pay for over-the-counter medications without a prescription.
“Being able to use an HSA to pay for over-the-counter medications,” said Alison Moore, vice president of marketing at HealthSavings Administrators, a firm that manages consumer-directed health accounts.
In addition, the CARES Act allows HDHPs to cover telemedicine free of cost sharing through year-end 2021. A new safe harbor permits HDHPs to cover telehealth and other remote care services before participants have met their deductible without affecting their eligibility to make HSA contributions.
HSA participants who are able to do so should consider contributing up to annual limits, not only to take advantage of the tax savings, but also to ensure that they are putting themselves in a position to better afford their future health care.
COVID-19 has caused scores of people to write Wills and make critical estate planning decisions about who will oversee their medical care and finances if they become ill or incapacitated. The basic estate documents clients typically want to review, such as a Will to legally name who should inherit their property; a durable financial power of attorney that assigns another person to make financial decisions for them if they're incapacitated. For more information, or to schedule your FREE consultation with Bob Michaels, click HERE.
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