The IRS recently issued Notice 2012-40 providing guidance on the $2,500 maximum annual limit on employee contributions to health care flexible spending accounts (“FSAs”) as set forth in the Affordable Care Act. The full text of the Notice can be found here.
The Act states that the limit is effective January 1, 2013 for any “taxable year.” The Notice clarifies that the $2,500 limit becomes effective for the first plan year for the employer’s cafeteria plan that begins on or after January 1, 2013. For calendar year cafeteria plans, the limit will be effective for the plan year beginning January 1, 2013. For fiscal year cafeteria plans, the limit will apply for the first plan year that begins in 2013.
Although amendments to cafeteria plans may be effective only prospectively, the IRS is permitting employers to amend their plans for the $2,500 limit through December 31, 2014 as long as the plan has operated in accordance with the new provision. However, for fiscal year employers who amended their cafeteria plans prospectively for the plan year beginning in 2012 and carrying into 2013, there is no guidance allowing a participant to make a mid-year change in election. Therefore, if the plan year has already begun and participant elections have been made, the cafeteria plan must maintain the $2,500 limit.
Other guidance in the Notice includes:
- The $2,500 limit will be indexed for cost-of-living adjustments for plan years beginning after December 31, 2013.
- If a health FSA provides the 2½ month grace period for a plan year, any unused salary reduction to the health FSA for the plan year that is carried over into the grace period does not count against the $2,500 limit that applies for the subsequent plan year.
- The $2,500 limit only applies to a health FSA. It does not apply to a dependent care or adoption assistance FSA, pre-tax premium salary reduction programs, or contributions to a health savings account or amounts available under a health reimbursement arrangement.
- The $2,500 limit does not apply to any employer non-elective contributions (e.g., flex credits) under a cafeteria plan unless an employee can elect to receive the amounts in cash or as another taxable benefit.
- The IRS has established a correction process for an employer that makes a mistake in the administration of the salary reduction limit.
In addition, the Notice request comments on whether the IRS should modify the “use it or lose it” rule that applies to health FSAs.
If you have questions, please contact Steve Lyman at slyman@hallrender.com or your regular Hall Render attorney.
