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May 31, 2012

HRB 51 - Guidance Issued Relating to $2,500 FSA Salary Reduction Cap

Released May 31, 2012I Download as a PDF

May 31, 2012 -- Some much anticipated and very welcome guidance has been issued by the IRS relating to the $2,500 flexible medical spending account (FSA) cap.  As background, the Affordable Care Act limits, to $2,500, the amount that can be contributed to an FSA through salary reduction.  This provision takes effect for the 2013 taxable year.  

In the newly released guidance (IRS Notice 2012-40), the taxable year is defined as the FSA’s plan year.  It was previously thought that January 1, 2013 was to be the determinative date, without regard to the plan year.  Fortunately, the government is interpreting ‘taxable year’ to mean the taxable year of the FSA plan.  What this means is that the $2,500 cap will apply to plan years beginning on or after January 1, 2013.  The IRS has indicated that the $2,500 amount will be indexed for plan years beginning on or after January 1, 2014.

Generally, cafeteria plans and FSA plans must be amended prospectively (in advance of the effective date of the change).  This guidance provides that plans have until December 31, 2014 to amend the FSA plan retroactive to the first plan year beginning on or after January 1, 2013.  However, plans must be administered in accordance with the change beginning on the first day of the first plan year beginning on or after January 1, 2013. 

In addition to this welcome news, the guidance provides a couple of other clarifications, as follows. 

The guidance clarifies that the $2,500 limit applies to each participant.  What this means is, if two spouses are employed, each spouse has his/her own right to make a $2,500 salary reduction contribution, assuming the plan allows it, even if the spouses are employed by the same employer.

If an employee is eligible for multiple FSAs offered by employers of a control group or affiliated group, the employee is limited to one $2,500 limit.  Conversely, if the individual is employed by unrelated employers, and is eligible to participate in multiple FSAs, the individual would be entitled to the relevant cap under each FSA.

The guidance affirms that the $2,500 limit applies to salary reduction contributions only; it does not apply to non-elective employer contributions, such as flex credits.  However, if flex credits are available to be taken in another form, such as cash, these amounts would be included in the maximum.

The guidance clarifies that if the plan includes a 2½ month grace period during which time claims can be incurred, the $2,500 limit will not be impacted.

It is important to note that the guidance does state a plan year cannot be changed solely for the purpose of delaying the applicability of the $2,500 cap. 

Finally, the guidance states that if a good faith mistake is made in complying with the $2,500 limit, then the IRS will grant certain relief from the failure to comply, as long as corrections are timely made.

All of this should come as welcome guidance.  Nevertheless, it is important to begin now to ensure compliance for the 2013 plan year.



About the Author:  Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc.  She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.  Ms. McLeese is based in the CBIZ Leawood, Kansas office.



The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation.

The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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