$2500 Limit for Health Care Flexible Spending Accounts under the Affordable Care Act

The Patient Protection and Affordable Care Act (the “Act”) imposes a $2,500 contribution limit on Health Care Flexible Spending Accounts (“health FSAs”) with “taxable years” that begin after December 31, 2012. Prior to this statutory limit taking effect, plan sponsors had the discretion to impose limits on the amounts of salary reduction contributions that employees could elect under the health FSAs.

 

On May 30, 2012, Notice 2012-40 was released and provides long awaited clarification of the Act’s statutory language regarding what constitutes a tax year for purposes of applying the contribution limit. This technical guidance explains that a tax year is defined as the plan year when calculating the limit.

 

In short, the Notice clarifies that:

 

1. the $2,500 limit applies to plan years that begin on or after January 1, 2013. Clients with off-calendar plan years that start before January 1, 2013 are not required to impose the limit until the following plan year that starts in 2013;

 

2. the $2,500 is a plan participant limit. In other words, a husband and wife who both work for the same employer may each elect $2,500;

 

3. the $2,500 is a plan limit. Specifically, a participant who works for two employers that are not in the same control group may elect $2,500 under each plan;

 

4. grace period amounts (i.e., amounts elected in a plan year that begins in 2012 that are available for the first 2 ½ months in the subsequent plan year), do not count toward the $2,500 limit;

 

5. plans must be amended to reflect this change before the end of 2014.

 

 

The new $2,500 limit reduces the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time. Given the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule should be modified. If so, CPN will notify you immediately regarding this topic.

 

 

The complete Notice is available at http://www.irs.gov/pub/irs-drop/n-12-40.pdf and will be in Internal Revenue Bulletin 2012-25, dated June 18, 2012.