Welcome Guidance from IRS on new Health FSA $2,500 Contribution Limit Under Health Care Reform

Posted by BAS - 31 May, 2012

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The Patient Protection and Affordable Care Act requires health care flexible spending accounts (FSAs) to limit salary reduction contributions to $2,500 beginning January 1, 2013. Presently, health FSAs are not subject to an annual contribution limit, although employers typically design their plans to impose a contribution maximum.

The IRS issued new guidance addressing the FSA maximum contribution limitation required under health care reform. This compliance relief will be particularly welcome for non-calendar year health FSAs.

Specifically, the notice provides that-

  • The $2,500 limit does not apply for plan years that begin before 2013.
  • The $2,500 limit applies to salary reduction contributions, only, and does not include flex credits offered by an employer.
  • The "taxable year" for determining the $2,500 contribution limit is the plan year of the cafeteria plan, and not necessarily the calendar year or the taxable year of the participant.
  • 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.
  • 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.

Interestingly, the IRS also requests comments on the long-standing FSA "use-it-or-lose-it" rule. Under this rule, unused FSA amounts are forfeited at the end of the plan year. The use-it-or-lose-it rule was implemented to avoid the deferral of compensation under a flexible spending account plan. The IRS observes that limiting contributions to $2,500 may alleviate some of the deferred compensation concerns and therefore the rule may no longer be necessary. The IRS specifically states that the request for comments is NOT guidance and the use-it-or-lose-it rule still applies.

Employers with non-calendar year health FSAs, particularly FSAs with a July 1 plan year, may have already amended their plans in anticipation of the 2013 contribution limit maximum. These plans now have specific guidance from the IRS providing that the $2,500 limitation will not apply until the plan year beginning on or after January 1, 2013 (in this case, the plan year beginning July 1, 2013). Employers may consider removing newly imposed contribution limitations and waiting until 2013 to impose the required $2,500 contribution limitation under health care reform.

Topics: Health Care Reform (ACA)


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