IRS Issues Guidance on $2,500 Health FSA Contribution Limit
Written by: Derek Winn
The Affordable Care Act (ACA) imposes an annual $2,500 limit on the amount of salary reduction contributions that an employee may make to a health flexible spending account (Health FSA). This limit applies to tax years beginning after December 31, 2012, and is indexed for inflation in ensuing years. The IRS on May 30 issued Notice 2012-40, which provides guidance on the limit, as well as how the PPACA (Patient Protection and Affordable Care Act) will affect FSAs in other ways, including the following:
· The tax year is determined with reference to a Health FSA’s plan year. Often the plan year will be the calendar year, but for a Health FSA with, for example, a July 1-June 30 plan year, the limit will first apply to the plan year that begins July 1, 2013.
· Employers may not change a Health FSA’s plan year for the purpose of delaying application of the new limit.
· Plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014;
· The limit applies only to salary reduction contributions and only to Health FSAs. As a result, the limit affects only amounts contributed to a Health FSA that an employee could have elected to receive as cash.
· The limit applies separately to each employee with respect to all Health FSAs maintained by a single employer. Closely related employers-like those in a controlled group of corporations or an affiliated service group-will be treated as a single employer for this purpose. Accordingly, the contributions made by one employee to two separate Health FSAs maintained by closely related employers must be aggregated to determine if the total exceeds $2,500.
· An employee and spouse may each contribute up to $2,500 to a Health FSA even if they work for the same employer and participate in the same Health FSA.
· Relief is provided for certain salary reduction contributions exceeding the $2,500 limit, due to a reasonable mistake and not willful neglect and that are corrected by the employer.
The notice also suggests that is possible that the “use-it-or-lose-it” rule, which states that unused FSA funds from the previous year must be forfeited at the start of the next, may be modified.
More information is available at http://www.irs.gov/pub/irs-drop/n-12-40.pdf.