Benefits Plans - Flexible Spending Accounts: Contribution Limits
Federal tax laws place limitations on the amount you can contribute to a Dependent Care Flexible Spending Account each plan year.
For 2013 you may choose an annual contribution of any whole dollar amount between $120 and $2,500 for a Health Care FSA.
You may choose an annual contribution of any whole dollar amount up to the maximum family amount for which you qualify for a Dependent Care FSA. Your maximum contribution depends upon your annual earnings in the prior calendar year, your tax filing status, your spouse's annual earnings, and several other factors. The minimum annual contribution is $120.
Special Limits for Highly Compensated Faculty and Staff
The IRS allows pre-tax contributions to Flexible Spending Accounts as long as the plan does not favor highly compensated employees (HCE) as defined by the IRS. You are considered "highly compensated" if your family gross earnings were $115,000 or more in 2012.
The IRS determines if a plan discriminates in favor of HCEs by looking at the ratio of participation between those who earned less than $115,000 in 2012 on the one hand, and those who earned $115,000 or more on the other.
In accordance with IRS regulations against discrimination, the Benefits Office examines FSA plans each year to ensure that they do not disproportionately benefit employees the IRS considers "highly compensated." The Benefits Office determines the amount that can be contributed by HCEs at the beginning of each year ($3,600), but if at any time during the year that ratio is not being met, the university will reduce contributions made by participants who earn $115,000 or more to ensure compliance with IRS rules.
If you are an HCE, your deduction may not exceed $3,600 per family for a married couple filing jointly, or for a single parent. For an HCE married person filing separately, the limit is $2,500. If a Dependent Care FSA fails the nondiscrimination text, highly-compensated employees will be taxed on all of the dependent care assistance benefits they received during a calendar year. Employees who are not highly compensated will not be affected. It is for this reason the $3,600 maximum contribution amount is imposed on certain employees considered to be HCEs as defined by the IRS.
Dependent Care Tax Credit
Depending on your income, it may be more advantageous to tax a Tax Credit when filing your income tax return than paying your expenses through a pre-tax Dependent Care FSA.
To determine whether it is more advantageous to use a Dependent Care FSA or to take a federal income tax credit, you may want to use the Dependent Day Care Tax Credit Wizard on the PayFlex/HealthHub website . You may also wish to consult a qualified tax advisor.
|Tax Filing Status||2012 Annual Earnings||Contribution Limit
(unchanged for 2013)
|Single||Less than $115,000||$5,000 per year|
|$115,000 or more||$300 per month ($3,6001 per year) ($3,600 per year)|
|Married, Filing Separately||Less than $115,000||$2,500 per year per each spouse|
|$115,000 or more||$2,500 per year per each spouse|
|Married, Filing Jointly||Less than $115,000||$5,000 per year per family|
|$115,000 or more||$300 per month ($3,6001 per year) per family|
1 If you are an HCE and are hired after January 1, the amount per year will be $300 times the number of months you will actually be enrolled in the plan. For example, if you will be enrolled in the plan for seven months, your maximum contribution will be $2,100. If you have any questions, contact the HR/Payroll Service Center.
Guidelines for Determining Your Dependent Care Maximum Contribution Amount
If you are married, your contributions are limited to the least of the following:
- Your earned income (after payroll deductions for other benefit plans) for the plan year, or
- Your spouse's earned income for the plan year.
Under federal law, if your spouse is not employed because he or she is a full-time student or is incapacitated during a month that you incur eligible dependent care expenses, your spouse's earned income for that month will be either:
- $250 if you incurred eligible expenses for one qualifying individual, or
- $500 if you incurred eligible expenses for two or more qualifying individuals.
If you are single, your contributions may not be in excess of your earned income (after reductions in taxable pay for contributions to other benefit plans) for the plan year.
The University of Michigan in its sole discretion may modify, amend, or terminate the benefits provided with respect to any individual receiving benefits, including active employees, retirees, and their dependents. Although the university has elected to provide these benefits this year, no individual has a vested right to any of the benefits provided. Nothing in these materials gives any individual the right to continued benefits beyond the time the university modifies, amends, or terminates the benefit. Anyone seeking or accepting any of the benefits provided will be deemed to have accepted the terms of the benefits programs and the university's right to modify, amend or terminate them.