June 8, 2012
IRS Issues Guidance on Health FSA $2,500 Limit
~ written by Charlene Bigelow, Client Advocate, Human Capital Practice, Willis
The Internal Revenue Service issued guidance (Notice 2012-40) regarding the effective date of the $2,500 limit on salary reduction contributions to health Flexible Spending Accounts. The guidance clarifies that the $2,500 limit does not apply for plan years that begin before 2013.
Effective for “taxable years” beginning after December 31, 2012, the Patient Protection and Affordable Care Act imposes a $2,500 limit (as indexed for inflation for tax years beginning after December 31, 2013) on annual salary reduction contributions to health flexible spending accounts (FSAs). According to the IRS, the term “taxable year” refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made.
The guidance also provides that plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of the calendar year 2014.
For plans providing a grace period (up to two months and 15 days immediately following the end of the plan year), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.
Relief is provided for certain salary reduction contributions that exceed the $2,500 limit if the error results from reasonable mistake by the employer, not due to willful neglect, and that are corrected by the employer.