The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living (COLA) and inflation adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The Consumer Price Index was 2.0 percent and therefore warranted increases in most indexed figures for 2018.
Social Security and Medicare Wage Base
For 2018, the Social Security wage base is $128,700. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.
In addition, individuals are liable for a 0.9 percent “Additional Medicare Tax” on all wages exceeding specific threshold amounts.
Indexed Compensation Levels
Highly compensated and key employee definitions (shown in the table).
"In 2018 the maximum for elective deferrals is $18,500 and the catch-up contribution for those 50 or older is $6,000. That means if you are age 50 or over during the 2018 taxable year, you may generally defer up to $24,500 into your 401(k) plan.
The annual limit for participant salary reductions for the healthcare flexible spending account (FSA) for plan years starting on or after January 1, 2018, may not exceed $2,650. However, this does not preclude employer contributions (as long as they are not convertible to cash) from being added to participants’ healthcare FSAs.
For 2018 this tax credit is $13,840. The credit starts to phase out at $207,580 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $247,580.
The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $13,840 limit for the 2018 taxable year. And remember—a participant may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.
Health Savings Account (HSA)
Minimum deductible amounts for the qualifying high-deductible health plan (HDHP) rose to $1,350 for self-only coverage and $2,700 for family coverage for 2018. Maximums for the HDHP out-of-pocket expenses also increased to $6,650 for self-only coverage and $13,300 for family coverage for 2018.
Maximum contribution levels to an HSA for 2018 are increased to $3,450 for self-only coverage and $6,900 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2018. Remember, there are two requirements in order to fund an HSA: You must have qualifying HDHP coverage and no other impermissible coverage (such as coverage under another employer’s plan or from a healthcare FSA that is not specifically compatible with an HSA).
Archer Medical Savings Account (MSA)
For high-deductible insurance plans that provide self-only coverage, the annual deductible amount must be at least $2,300 but not more than $3,450 for 2018. Total out-of-pocket expenses under plans that provide self-only coverage cannot exceed $4,600. For plans that provide family coverage in 2018, the annual deductible amount must be at least $4,600 but not more than $6,850, with out-of-pocket expenses that do not exceed $8,400.
Although new MSAs are not allowed, maximum contributions to existing MSAs that are attributable to single-coverage plans is 65 percent of the deductible amount. Maximum contributions for family-coverage plans are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.
Dependent and/or Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form. Limits for daycare credit expenses are $3,000 of expenses covering one child and $6,000 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.
The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a participant filing a single return, or filing as “Head of Household.” For a married couple filing separate returns, the limit is $2,500 each. The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.
For 2018 the monthly parking limit is $260 and the 2018 monthly limit for transit also increases to $260.
Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment remains the same at $360 per day for 2018.
Finally, by participating in a cafeteria plan, the participant will be lowering their income for the Earned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
Janet LeTourneau, ACFCI
ACFCI is the Director of Compliance Services at WageWorks. She draws upon more than 25 years of experience with flexible benefits plans and tax laws to perform consulting services and monitor quality control. LeTourneau is a frequent speaker to employer groups and conferences and was formerly on the board of directors for the Employers Council on Flexible Compensation (ECFC) and is a current member of the ECFC Technical Advisory Committee (TAC). She is the lead instructor for the Section 125 administrators training workshop. LeTourneau was one of the first people in the country to earn the Advanced Certification in Flexible Compensation Instruction designation sponsored by the Employers Council on Flexible Compensation. She is a certified trainer in the ACFC program. LeTourneau can be reached by telephone at 262-236-3021 or by email at firstname.lastname@example.org.