Among the many changes made by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 is the imposition of a statutory limit on the amount of salary reduction contributions that may be made by employees to a health flexible spending or medical expense reimbursement account. The new limit of $2,500 applies to taxable years beginning on or after January 1, 2013, and the amount will be indexed for cost-of-living adjustments in future years.

For this purpose, “taxable year” means the plan year of the Section 125 cafeteria plan and the period for which salary reduction elections are made. So, if a cafeteria plan has a July 1 - June 30 plan year, the new limitation will become effective as of July 1, 2013. Initially, there was some confusion as to how the restriction would apply to non-calendar year plans. However, the IRS provided clarification earlier this year in the form of Notice 2012-40.

The Notice also confirms that the $2,500 cap applies on an employee-by-employee basis. If both spouses are participants in the same flexible spending arrangement, each may elect to make a salary reduction contribution of up to $2,500. Moreover, the limit applies only to salary reduction contributions and not to any employer provided contributions or credits.

Obviously, the new $2,500 limit will necessitate amendment of any plan or program that previously permitted salary reduction contributions in excess of that amount. Although the date by which the amendment must be adopted has been extended through the end of calendar year 2014, employers are urged to act more quickly so as to avoid errors and misunderstanding among participants.