On May 30, 2012, Notice 2012-40 was released, providing clarification of the Affordable Care Act’s statutory language regarding the contribution limit imposed on Health Care Flexible Spending Accounts (health FSAs).

Background

• Under the Patient Protection and Affordable Care Act “the Act”), a $2,500 contribution limit is imposed on Health Care Flexible Spending Accounts (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 amount of salary reduction contributions that employees could elect under health FSAs.
  

  TASC is a Flexible Spending Account Vendor. Pictured above is the TASC card presented at the pharmacy or doctor’s office when using FSA funds.

The Notice clarifies that:

1. The $2,500 limit applies to plan years that begin on or after January 1, 2013. Groups 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, meaning that a husband and wife who both work for the same employer may each elect $2,500;
3. The $2,500 is a plan limit. For example, 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;
6. A short plan year that begins on or after January 1, 2013 must impose a prorated $2,500 limit on a monthly basis; and
7. Employer deposits or credits to a health FSA do not count toward the $2,500 limit unless they are credits that may be elected as cash or a non-taxable benefit, in which case they do count toward the $2,500 limit.

 

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. The Treasury Department and IRS are considering whether the use-or-lose rule should be modified.

To view the complete Notice, visit http://www.irs.gov/pub/irs-drop/n-12-40.pdf.

 

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