202-776-5000
IRS Issues Notice on FSA $2500 Limit

Limit applies to plan years starting 2013 and beyond
June 1, 2012

On May 30, 2012, the Internal Revenue Service (IRS) issued a Notice on the new $2500 Limit on Health Care Flexible Spending Accounts (FSAs). The Notice clarifies that this provision of the Patient Protection and Affordable Care Act (PPACA) applies to plans beginning after December 31, 2012. The Notice also confirms the deadline for amending cafeteria plan documents and offers new relief for inadvertent excessive contributions among other important points.

The limit applies on an employee-by-employee basis rather than per household, so spouses may each contribute up to $2500 to separate FSAs. In other words, contribution limits could be up to $5000 per household for families where each spouse contributes separately.

While the law uses the term “taxable year,” the IRS is interpreting this to mean the plan year since salary reductions are made based on the plan year.

While the $2500 limit is effective the first plan year beginning after December 31, 2012, plans have until the end of 2014 to amend their cafeteria plan documents retroactively to the effective date. Amendments may be expressed as a maximum dollar amount or by another method of determining maximum dollar amounts of salary deduction contributions.

Here are some additional important points provided in the Notice:

Should salary reductions mistakenly exceed the $2500 limit, the plan may still be compliant as long as the terms of the plan apply uniformly to all participants and the error results from a reasonable mistake by the employer (or agent) and is not due to willful neglect. Excessive contributions must be paid to employees and reported as taxable wages for the taxable year in which the correction is made.

Use-it-or-Lose-it Rule

Specific comments are also requested on potential modifications to the “use-it-or-lose-it” rule, whereas employees who currently do not use all of their elected payroll deductions within their plan year (and applicable grace period) forfeit those dollars back to the plan. The IRS is considering whether this rule should be modified to offer administrative flexibility, and how such adjustments might interact with the $2500 limit.

Comments are due to the IRS by August 17, 2012.