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IRS Announces 2022 COLAs for Health and Welfare Plans
Practical Law Legal Update w-033-3357 (Approx. 8 pages)
IRS Announces 2022 COLAs for Health and Welfare Plans
by Practical Law Employee Benefits & Executive Compensation
| Published on 11 Nov 2021 • USA (National/Federal) |
The Internal Revenue Service (IRS) has announced cost-of-living adjustments for limits involving health and welfare plans and certain fringe benefit arrangements governed by the tax code (Rev. Proc. 2021-45).
The Internal Revenue Service (IRS) has announced the 2022 cost-of-living adjustments (COLAs) for certain limits affecting health and welfare plans (Rev. Proc. 2021-45 (Nov. 10, 2021)). (The IRS also recently issued the 2022 COLAs for retirement plans (Notice 2021-61; see Legal Update, IRS Notice 2021-61 Announces 2022 Retirement Plan Limit Adjustments).)
Regarding the benefits-related COLAs for 2021, see Legal Update, IRS Announces 2021 Benefit Plan Limit Adjustments.
Limits for Fringe Benefits and Other Code-Governed Health and Welfare Arrangements
For 2022, the following limits will apply under Rev. Proc. 2021-45:
- The dollar limit on employee salary reduction contributions to health flexible spending arrangements (health FSAs) is $2,850 (for 2021, this amount is $2,750) (see Practice Note, Cafeteria Plans: Dollar Limit on Employee Salary Reduction Contributions to Health FSAs). For cafeteria plans that permit carryovers of unused amounts, the carryover limit is $570 (for 2021, this amount is $550).
- The maximum credit allowed for adoption of a child is $14,890 (a $450 increase from 2021). The adoption credit begins to be phased out for individuals with modified adjusted gross incomes (MAGI) of more than $223,410 (for 2021, this amount is $216,660), and is completely phased out for individuals with MAGI of $263,410 or more (for 2021, this amount is $256,660 or more). Both phase-out adjustments are an increase of $6,750 over their 2021 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs and Fringe Benefits Toolkit).
- The maximum amount that can be excluded from an employee's gross income to adopt a child under an employer's adoption assistance program is $14,890 (a $450 increase from 2021). The exclusion begins to be phased out for individuals with MAGI of more than $223,410 (for 2021, this amount is $216,660), and is completely phased out for individuals with MAGI of $263,410 or more (for 2021, this amount is $256,660 or more). Both phase-out adjustments are an increase of $6,750 over their 2021 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
- The monthly limits for qualified transportation fringe benefits are as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle is $280 (increased from $270 for 2021) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation Benefits); and
- the monthly limit an individual can exclude for qualified parking is $280 (increased from $270 for 2021) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation Benefits: Overview of Qualified Transportation Fringe Benefits).
- The total payment and reimbursement amounts for the year under a qualified small employer health reimbursement arrangement (QSEHRA) cannot exceed:
- $5,450 (increased from $5,300) (26 U.S.C. 9831(d)); or
- $11,050 for family coverage (increased from $10,700).
- Regarding Archer medical savings accounts (Archer MSAs), a high-deductible health plan (HDHP) (self-only coverage) is a health plan with an annual deductible that is:
- not less than $2,450 (increased from $2,400 for 2021); and
- not more than $3,700 (increased from $3,600 for 2021).
Annual out-of-pocket expenses for covered benefits must not exceed $4,950 (increased from $4,800 for 2021) (see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)). - Also regarding Archer MSAs, an HDHP (family coverage) is a health plan with an annual deductible that is:
- not less than $4,950 (increased from $4,800 for 2021); and
- not more than $7,400 (increased from $7,150 for 2021).
Annual out-of-pocket expenses for covered benefits must not exceed $9,050 (increased from $8,750 for 2021). - Under the ACA's small business health care tax credit, the maximum credit is phased out based in part on an employer's average annual wages in excess of $28,700 for 2022 (an increase of $900 from 2021) (26 U.S.C. § 45R). The $28,700 amount also is used in calculating who is an eligible small employer for the credit (see Practice Note, Small Business Health Care Tax Credit Under the ACA).
In addition, the limit used in the key employee definition for purposes of cafeteria plan nondiscrimination testing will increase from $185,000 to $200,000 (Notice 2021-61; see Practice Note, Cafeteria Plans: Key Employee Nondiscrimination Test).
ACA Affordability Percentage (Employer Mandate Penalties)
Earlier in the year, the IRS also issued the 2022 percentage for determining whether an individual is eligible for affordable employer-sponsored minimum essential coverage for ACA purposes (see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors). An employer is subject to employer mandate penalties (under Code Section 4980H(b)) unless it offers coverage that is affordable and provides minimum value (26 U.S.C. § 4980H(b)).
For plan years beginning in 2022, an employer's coverage is affordable for an employee if the employee's required contribution is no more than 9.61% of the employee's household income (down from 9.83% for 2021) (Rev. Proc. 2021-36).
ACA Premium Tax Credit
The ACA provides for a refundable tax credit (known as the premium tax credit (PTC)) for eligible individuals and families who purchase health insurance through an ACA health insurance exchange (26 U.S.C. § 36B; see Practice Note, Affordable Care Act (ACA) Overview). Individuals who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. However, if an individual's advance credit payments are more than the actual PTC, the individual owes the excess credit as a tax.
The following limits apply for tax years beginning in 2022:
- If household income is less than 200% of the federal poverty line (FPL), the limits are:
- $325 for unmarried individuals (other than surviving spouses and heads of households) (unchanged from 2021); and
- $650 for all other taxpayers (unchanged from 2021).
- If household income is at least 200%, but less than 300%, of the FPL, the limits are:
- $825 for unmarried individuals (other than surviving spouses and heads of household) (increased from $800 for 2021); and
- $1,650 for all other taxpayers (increased from $1,600 for 2021).
- If household income is at least 300%, but less than 400%, of the FPL, the limits are:
- $1,400 for unmarried individuals (other than surviving spouses and heads of household) (increased from $1,350 for 2021); and
- $2,800 for all other taxpayers (increased from $2,700 for 2021).
(Rev. Proc. 2021-45.)
ACA Information Reporting
Regarding ACA information reporting, the IRS announced increases to the calendar-year limits for penalties regarding:
- Filing a correct information return, for returns required to be filed in 2022 (26 U.S.C. § 6721).
- Furnishing a correct statement to individuals, for statements required to be furnished in 2022 (26 U.S.C. § 6722).
(Rev. Proc. 2021-45.)
For more information, see Practice Notes:
PCOR Dollar Amount
Last fall, the IRS also announced the applicable dollar amount for calculating patient-centered outcomes research (PCOR) fees for policy and plan years ending on or after October 1, 2020, and before October 1, 2021 (that is, $2.66) (Notice 2020-84; see Practice Note, Patient-Centered Outcomes Research (PCOR) Fees Under the ACA and Legal Update, PCOR Dollar Amount to Increase By 12 Cents, to $2.66).
HSA Limits for 2022
Earlier in the year, the IRS issued 2022 inflation adjustments for health savings accounts (HSAs) and HDHPs (Rev. Proc. 2021-25 (May 10, 2021); see Practice Note, Defined Contribution Health Plans: Overview). Under this guidance, the annual HSA contribution limit for 2022 for an individual with:
- Self-only HDHP coverage is $3,650 (an increase of $50 from 2021).
- Family HDHP coverage is $7,300 (an increase of $100 from 2021).
For 2022, an HDHP is a health plan with:
- An annual minimum deductible of:
- $1,400 for self-only HDHP coverage (unchanged from 2021); and
- $2,800 for family HDHP coverage (unchanged from 2021).
- Annual out-of-pocket expenses (that is, deductibles, copayments, and other amounts, but excluding premiums) that are not more than:
- $7,050 for self-only HDHP coverage (an increase of $50 from 2021); and
- $14,100 for family HDHP coverage (an increase of $100 from 2021).
Excepted Benefit HRAs (EBHRAs)
Rev. Proc. 2021-25 also included the 2022 limit for amounts made newly available for excepted benefit HRAs (EBHRAs) (see Practice Note, Excepted Benefit Health Reimbursement Arrangements (EBHRAs)). Under implementing regulations, EBHRAs are an excepted benefit—and therefore need not satisfy certain otherwise-applicable group health plan requirements—if they satisfy several conditions (see Practice Note, Excepted Benefits). Under one of these conditions, amounts that are newly made available each plan year under an EBHRA may not exceed $1,800 (as adjusted for inflation)).
The 2022 inflation adjustment for EBHRAs is the initial $1,800 limit multiplied by a COLA that is the percentage (if any) by which the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) for the prior calendar year is more than the C-CPI-U for 2019 (26 C.F.R. § 54.9831-1(c)(3)(viii)(B)).
Inflation adjustments to the C-CPI-U that are not a multiple of $50 are rounded down to the next lowest multiple of $50. Under this calculation, the maximum amount that may be made newly available for an EBHRA for plan years beginning in 2022 will remain $1,800.
Social Security Wage Base
On October 13, 2021, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2022 will increase to $147,000 from $142,800, in 2021.