New FSA Contribution Limits and Compliance Challenges for Insurers

The recent legislative change has increased the annual contribution limit for dependent care Flexible Spending Accounts (FSAs) from $5,000 to $7,500. This adjustment presents compliance challenges for employers in the insurance industry. To align with updated regulatory requirements, relevant FSA plans must be revised by the December 31, 2026 deadline.

Compliance Challenges and Nondiscrimination Testing

A critical concern for employers is the impact on nondiscrimination testing, particularly the 55% "Average Benefits Test." This test ensures that benefits provided to non-highly compensated employees comprise at least 55% of those offered to their highly compensated counterparts. With the new contribution ceiling, employers face increased risk of noncompliance as highly compensated employees adjust their contributions.

The enhanced child and dependent care tax credit presents another layer of complexity. Lower-income employees may opt out of dependent care FSAs, complicating employers' efforts to meet compliance and regulatory standards. Resources like Tax Facts Online provide essential guidelines to help employers maintain compliant FSA plans.