On October 22, 2024, the IRS released the 2025 inflationary (cost of living) adjustments relating to several types of benefits. Below are select highlights from IRS Revenue Procedure 2024-40.
Flexible Spending Account (FSA) Cap
The limit on the amount that can be contributed to a health flexible spending account (FSA) through voluntary salary reductions for plan years beginning in 2025 increases to $3,300, up from $3,200 in 2024.
Carryover
For cafeteria plans that permit a carryover of unused amounts, the maximum carryover limit will increase to $660 in 2025, up from $640 in 2024.
Dependent Care Assistance
As a reminder Dependent Care Assistance offered in accordance with Internal Revenue Section 129 is not tied to inflation and remains $5000 ($2,500 in the case of married individuals filing separately).
Qualified Transportation Fringe Benefits
With regard to transportation expenses reimbursed by an employer and excludable from the employee’s income under a qualified transportation program, the limits increase for 2025:
As a reminder, the Tax Cuts and Jobs Act (TCJA) suspended the employer’s deductibility of qualified transportation expenses, effective January 1, 2018. The tax exclusion available to employees remains applicable. In addition, the TCJA suspended the qualified bicycle commuter benefit from December 31, 2017, through December 31, 2025. An employer sponsoring a qualified bicycle fringe benefit plan can still take a tax deduction (up to $20 per month, or $240 annually) for reimbursing participating employees who use a bicycle for traveling between their home and place of employment. However, these amounts can no longer be excluded from the employee’s income.
Qualified Adoption Assistance Reimbursement Program (IRC §137)
An employer- provided adoption assistance program that meets the qualifications of IRC §137, allows participants to recover expenses relating to adoption, such as reasonable adoption fees, court costs, attorney’s fees and traveling expenses. Below are the exclusion limits and AGI phase-out limits for 2025 and 2024:
Archer Medical Savings Accounts
The Archer MSA pilot project ended on December 31, 2007; therefore, no new MSAs could be established after that date. For existing MSAs, the annual deductible limits of a high deductible health plan used in conjunction with an Archer Medical Savings Account for 2025 are increasing slightly:
Long-Term Care Premiums
The IRS limitations relating to eligible long-term care premiums includible as medical care, as defined by IRC §213(d) are:
Small Business Tax Credit (SBTC)
Small businesses and tax-exempt employers who provide health care coverage to their employees under a qualified health care arrangement are entitled to a tax credit, as established by the Affordable Care Act. To be eligible for the small business tax credit, the employer must employ fewer than 25 full-time equivalent employees whose average annual wages are less than $ (indexed for 2025; the wage ceiling in 2025 is $66,600). The tax credit phases out for eligible small employers when the number of its full-time employees (FTEs) exceeds 10; or, when the average annual wage for the FTEs exceeds $33,300 in the 2025 tax year (the phase-out wage limit in 2025 is $33,300). As a reminder, only qualified health plan coverage purchased through a SHOP marketplace is available for the tax credit, and only for a 2-consecutive year period.
QSEHRA Payments and Reimbursements
A qualified small employer health reimbursement arrangement, known as a “QSEHRA”, allows eligible small employers (those employing fewer than 50 employees and who do not offer health coverage) to reimburse health insurance premiums for individual coverage purchased either through or outside the marketplace. Such arrangement must meet certain criteria, specifically, the QSEHRA:
- Must be funded solely by the eligible small employer; no salary reduction contributions can be made under this arrangement; and,
- Provides, following the employee’s proof of coverage, for the payment or reimbursement for medical care expenses, as defined in IRC Section 213(d)), including premium for health coverage through the individual market, incurred by the eligible employee or his/her family members. For 2024, the annual amount of payments and reimbursements is capped at $6,150 for employee- only, or $12,450 for arrangements that provide for payments or reimbursements for the employee’s family members. Both of these limits are subject to inflationary adjustments. Accordingly, beginning in 2025, the total amount of payments and reimbursements will increase to $6,350 for employee-only; $12,800 for family coverage). As a reminder, the total amount of permitted benefits received under a QSEHRA must be reported in Box 12, using Code FF of the Form W-2.
Premium Tax Credit for Coverage under a Qualified Health Plan
Individuals who buy coverage through the marketplace and meet certain income criteria may be eligible for an advance credit payment wherein a portion of the premium is made directly to the insurer to cover the cost of coverage. The amount of an individual’s premium tax credit is reduced by the amount of any advance credit payments made during the year. If the advance credit payment for a taxable year exceeds the premium tax credit limit, the individual would owe the excess as additional tax, subject to certain inflationary limits. For tax years beginning in 2025, the limitation on tax imposed for excess advance credit payments is determined using the following table:
Penalties for Failure to File Correct Information Returns and Failure to Furnish Correct Payee Statements
In the case of any failure relating to a return required to be filed or a statement required to be furnished in 2025 and 2024. Examples include W-2s and 1095s. The penalty amounts for each information return or payee statement under § 6721 and § 6722 are:
There is no maximum penalty for intentional disregard. As of 2022 good-faith relief is no longer available for late filings, therefore, it is very important that information returns are timely filed and provided to individuals.
Cost Sharing Requirements
The ACA imposes certain cost-sharing restrictions, such as deductible and out-of-pocket (OOP) limits on health plans. These limits are adjusted annually and apply to (1) insured plans offered through the marketplace; and (2) insured and self-funded plans offered outside marketplace.
Note: The OOP limits applicable to high deductible health plans (HDHP) used in conjunction with health savings accounts (HSAs) differ from these cost sharing limits.
Affordability Standard – Employer Shared Responsibility Mandate
The IRS previously issued the 2025 Affordability Standards, the 2025 amount is 9.02%, an increase from the 2024 amount of 8.39%.
Social Security Cost of Living Adjustment
The Social Security Administration announced a 2.5% cost of living adjustment for 2025. The Social Security wage base in 2025 will increase to $176,100 from the 2024 wage level of $168,600. The combined Social Security and Medicare tax rate remains at 7.65% - the Social Security portion is 6.2% on wages up to the applicable maximum taxable amount; the Medicare portion is 1.45% on all wages. Additional adjustments are included in the SSA’s Fact Sheet, 2025 Social Security Changes.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. This information is provided as general guidance and may be affected by changes in law or regulation. This information is not intended to replace or substitute for accounting or other professional advice. You must consult your own attorney or tax advisor for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.