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-
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.