The new $2,500 limit on salary-reduction contributions to health flexible spending arrangements (FSAs) will not apply to plan years beginning before 2013, according to new guidance released by the IRS. In Notice 2012-40, the IRS clarified the timing of this new limitation, set a deadline by which plan amendments must be adopted, and invited comments on the current “use-it-or-lose it” rule.
- Timing. The $2,500 limit on health FSA salary-reduction contributions is effective for plan years beginning after December 31, 2012. Prior to the issuance of the Notice, it was unclear whether all plans were required to implement the change on January 1, 2013; this was a concern for non-calendar-year plans, which would be faced with administering a new limitation mid-year. The guidance clarifies that the new limit will not apply to plan years beginning before January 1, 2013.
- Application. The $2,500 limit only applies to salary-reduction contributions under a health FSA. The new limit does not apply to a dependent or adoption care FSA, a health savings account (HSA), or a health reimbursement arrangement (HRA). In addition, certain employer “flex credits” to a health FSA are not covered by the new limit. Finally, the $2,500 limit is the maximum contribution that each employee may make for the year, regardless of whether the employee has a spouse or dependents whose expenses are also reimbursed through his or her health FSA.
- Plan Amendments. All cafeteria plans offering a health FSA must be amended to comply with the new limit by December 31, 2014.
- Future Limit Adjustments. The $2,500 limit will be indexed for cost-of-living adjustments for plan years beginning after December 31, 2013.
- “Use-it-or-lose-it”. The Notice requests comments on whether the current “use-it-or-lose-it” rule applicable to health FSAs should be modified in light of the $2,500 limit. Presently, any amounts remaining in an employee’s health FSA account at the end of a plan year cannot be carried over to the next year. Plans may (but are not required to) offer a 2½ month grace period following the end of each plan year during which employees may use amounts remaining from the previous year to pay expenses incurred during the grace period. The Notice requests comments on whether the use-it-or-lose-it rule should be modified to provide different administrative relief in addition to, or instead of, the current grace period. Comments on the Notice are due by August 17, 2012.