Rev. Proc. 2015-53

News Release

The IRS has released the 2016 cost-of-living adjustments (COLAs) for a wide variety of tax-related limits, including limits relating to salary reductions under health FSAs, qualified transportation fringe benefits, adoption assistance, DCAPs, the small business health care tax credit, premium tax credit, and Archer MSAs.

• Health FSAs. For 2016, the dollar limit on employee salary reduction contributions to health FSAs will remain at $2,550.
• Qualified Transportation Fringe Benefits. For 2016, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits will be $255 (a $5 increase from the 2015 monthly limit of $250). The combined monthly limit for transit passes and vanpooling expenses for 2016 will remain at $130.
• Adoption Assistance Exclusion and Adoption Credit. The maximum amount that may be excluded from an employee’s gross income under an employer-provided adoption assistance program for the adoption of a child will be $13,460 for 2016 (a $60 increase from the 2015 maximum of $13,400). In addition, the maximum adoption credit allowed to an individual for the adoption of a child will be $13,460 for 2016 (also a $60 increase from 2015). Both the exclusion and the credit will begin to be phased out for individuals with modified adjusted gross incomes greater than $201,920 and will be entirely phased out for individuals with modified adjusted gross incomes of $241,920 or more (these income levels are $910 higher than for 2015).
• DCAPs. While the $5,000/$2,500 DCAP limit has not changed (it is a non-indexed limit), there are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2016 tax rate tables, earned income credit amounts, personal exemption amount, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.
• Small Business Health Care Tax Credit. For 2016, the average annual wage level at which the tax credit begins to phase out for eligible small employers is $25,900 (a $100 increase from the 2015 threshold). The maximum average annual wages to qualify for the credit as an “eligible small employer” for 2016 will be twice this amount, i.e., $51,800 (a $200 increase from the 2015 amount).
• Premium Tax Credit. For taxable years beginning in 2016, the following limitations on the tax for excess advance credit payments will apply: For unmarried individuals (other than surviving spouses and heads of household), $300 for household income less than 200% of the federal poverty line (FPL); $750 for household income at least 200% but less than 300% of FPL; and $1,275 for household income at least 300% but less than 400% of FPL. For all other taxpayers, $600 for household income less than 200% of FPL; $1,500 for household income at least 200% but less than 300% of FPL; and $2,550 for household income at least 300% but less than 400% of FPL. This tax is imposed if a taxpayer’s advance premium tax credit payments for health insurance purchased through an Exchange for a year exceed the allowed credit. 
• Archer MSAs. For Archer MSA-compatible high-deductible health coverage, the annual deductible for self-only coverage must not be less than $2,250 (up $50 from the 2015 minimum of $2,200) or more than $3,350 (up $50 from the 2015 maximum of $3,300), with an out-of-pocket maximum of $4,450 (no change from 2015). For family coverage, the annual deductible must not be less than $4,450 (no change from 2015) or more than $6,700 (up $50 from the 2015 maximum of $6,650), with an out-of-pocket maximum of $8,150 (no change from 2015).

Other 2016 limits with benefit implications include the thresholds for determining who is a “control employee” under the commuting valuation rule (announced in IRS guidance on other limits), the limits on the long-term care premiums that will be considered medical care under Code § 213(d), and limits applicable to certain penalties for failures related to information returns and individual statements, including those required under health care reform on Forms 1094 and 1095.

Comment: Sponsors and administrators of benefits with limits that are changing (e.g., adoption assistance plans) will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees. Whether Congress will eventually extend the “rule of parity” that made the combined transit/vanpooling limit the same as the parking limit until the end of 2014 remains to be seen. Note that the Archer MSA pilot program expired at the end of 2007, which means that no new Archer MSAs can be established after that date. Many who previously had Archer MSAs have switched to HSAs, which are generally more favorable.