IRS Releases 2022 Inflation Adjustments to Various Tax Limitations on Employer-Provided Benefits

On November 10, 2021, the IRS released Revenue Procedure 2021-45, which contains its annual inflation adjustments for over 60 tax provisions, including not only individual income tax rates and deductions, but also many employer-provided benefits. Under the Internal Revenue Code, employers can provide employees with a variety of fringe benefits that are tax exempt if they meet certain criteria, including limitations on the amount of the benefits.  Those limitations generally increase from year to year based on inflation.

Among the tax provisions of importance to employers are those relating to transportation fringe benefits, the foreign earning income exclusion, and qualified adoption assistance benefits. Below are some of the highlights for 2022:

  • The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $280.
  • The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,850.  For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570.
  • The foreign earned income exclusion is $112,000. This limitation can have implications for income tax withholding when employees are on assignment outside the United States.
  • The limitation on qualified adoption assistance expenses is $14,890.
  • For individuals who participate in self-only coverage under a Medical Savings Account, the plan must have an annual deductible that is not less than $2,450, up $50 from tax year 2021, and not more than $3,700, an increase of $100 from tax year 2021. For self-only coverage, the out-of-pocket expense limit is $4,950. For family coverage, the annual deductible cannot be less than $4,950, up from $4,800 in 2021, but cannot exceed $7,400, up $250 from the limit for tax year 2021. Also, for family coverage, the out-of-pocket expense limit is $9,050.
  • The potential penalty imposed on employers for failing to file a correct information return such as a 1099 or W-2 rises to $290.

Also, on November 4, 2021, in Notice 2021-61, the IRS increased the amount employees who participate in 401(k), 403(b) and most 457 plans can contribute increased to $20,500, with those over 50 being entitled to additional “catch up” contributions of $6,500.

Employers should review these various benefit plans such as qualified transportation fringe benefits and adoption assistance plans to ensure that the increased limits are properly stated and implemented for 2022.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.