The Affordable Care Act sets a maximum limit on the pre-tax contributions that an employee may make to a health flexible spending account plan. Prior to health care reform, employees were not limited by the government on the amount that could be contributed to a health FSA. While many employer plans have always set maximum contribution limits, these limits were employer/plan imposed, and not set by the federal government. Now, all health FSAs must include contribution limitations. Plans should be amended for the new limitation, and the limit should be communicated to employees during this year's open enrollment period.
For plan years beginning on or after January 1, 2013, an employee's salary reduction contributions to a health FSA may not exceed $2,500. The $2,500 limit applies to salary reduction contributions, only, and does not include contributions such as flex credits offered by an employer. The taxable year for determining the $2,500 contribution limit is the plan year of the FSA. If an employer sponsors multiple health FSAs, the employee's total salary reduction contributions to all of the health FSAs may not exceed $2,500.
FSAs may be amended retroactively for the new contribution limit any time before the end of 2014, so long as the plan is operating in compliance with the limitation beginning in 2013.
If the FSA provides a grace period for plan years beginning in 2012, and that grace period runs into the 2013 calendar year, amounts carried over into the grace period will not count against the $2,500 maximum for the subsequent plan year. Moreover, if a cafeteria plan has a short plan year that begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year.
The $2,500 limit applies on an employee-by-employee and employer-by-employer basis. Two family members participating in different health FSAs may each make the maximum $2,500 contribution, and an individual employed by two non-related employers may make the maximum contribution to each employer’s health FSA.
Employers should review their open enrollment materials and plan documents to make sure the $2,500 salary contribution limit is properly implemented and communicated to participants.