IRS releases 2021 inflation adjustments for fringe benefits and Form W-2 reporting penalties

27 October 2020

In Revenue Procedure 2020-45 the IRS announced the inflation adjustments that will apply to various fringe benefits in 2021.

Medical Savings Account (MSA) limits go up in 2021

Summarized below are the 2021 limits that apply to MSAs under IRC Section 220(c)(2)(A).

Provision	Self-only coverage	Family coverage
High deductible health plan: annual deductible	Not less than $2,400 (up from $2,350 in 2020) and not more than $3,600 (up from $3,550 in 2020)	Not less than $4,800 (up from $4,750 in 2020) and not more than $7,150 (up from $7,100 in 2020)
Annual out-of-pocket (other than for premiums)	Not to exceed $4,800 (up from $4,750 in 2020)	Not to exceed $8,750 (up from $8,650 in 2020)

Adoption assistance limit goes up in 2021

The limit on qualified adoption assistance (including benefits provided for special needs children) under IRC Section137 for 2021 is $14,440, up from $14,300 in 2020.

For 2021, the amount excludable from an employee's gross income begins to phase out under IRC Section 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $216,660 and is completely phased out for taxpayers with modified adjusted gross income of $256,660 or more.

Health flexible spending arrangement (FSA) limit unchanged from 2020

The 2021 annual limit on the amount of pretax contributions employees can make toward their health flexible spending arrangement through a cafeteria plan under IRC Section 125(i) is $2,750, unchanged from 2020.

Transportation fringe benefits (parking and transit) limit unchanged from 2020

The 2021 monthly limit on parking benefits under IRC Section 132(f)(2)(B) is $270, unchanged from 2020.

The 2021 aggregate monthly limit for transportation in a commuter highway vehicle and any transit pass under IRC Section 132(f)(2)(A) is also $270, unchanged from 2020.

Foreign earned income exclusion for 2021

For tax years beginning in 2021, the foreign earned income exclusion amount under Section 911(b)(2)(D)(i) is $108,700.

Reporting penalties for Forms W-2/1099 increase for tax year 2021

The penalties that apply to late or incorrect Forms W-2 is indexed each year for inflation. Below are the penalties that apply to late or incorrect Forms W-2 required to be furnished to employees and/or filed with the Social Security Administration for tax year 2021 (filed in 2022).

IRC Section 6721: Failure to timely file an accurate information return with the IRS (for returns required to be filed in 2022)
Filed/corrected on or after	On or before	Penalty	Maximum	Maximum small employer
1/1	1/31	$0	N/A	N/A
2/1	2/28	$50	$571,000	$199,500
3/1	8/1	$110	$1,713,000	$571,000
8/1		$280	$3,426,000	$1,142.000
	intentional disregard	$570	no limit	no limit
IRC Section 6722: Failure to furnish correct payee statements (for statements required to be furnished in 2022)
Filed/corrected on or after	On or before	Penalty	Maximum	Maximum small employer
1/1	1/31	$0	N/A	N/A
2/1	2/28	$50	$571,000	$199,500
3/1	8/1	$110	$1,713,000	$571,000
8/1		$280	$3,426,000	$1,142.000
	intentional disregard	$570	no limit	no limit

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Contact Information
For additional information concerning this Alert, please contact:

Workforce Tax Services - Employment Tax Advisory Services
• Debera Salam (debera.salam@ey.com)
• Kristie Lowery (kristie.lowery@ey.com)
• Kenneth Hausser (kenneth.hausser@ey.com)
Compensation and Benefits Group
• Christa Bierma (christa.bierma@ey.com)

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ATTACHMENT

EY Payroll News Flash

Document ID: 2020-2562