A provision of the Patient Protection and Affordable Care Act that is slated to take effect on January 1, 2013, limits Flexible Spending Account contributions to $2,500 per tax year. On May 30, 2012, the IRS published Notice 2012-40 regarding Section 125 Cafeteria Plans. This notice provides guidance on the effective date of the $2,500 limit (as indexed for inflation) on salary reduction contributions to health flexible spending arrangements (health FSAs) and on the deadline for amending plans to comply with that limit. This notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and that are corrected in a timely manner. Finally, the notice requests comments on whether to modify the use-or-lose rule that is currently set forth in the proposed regulations with respect to health FSAs.
Before the clarification issued by the IRS was issued, most non-calendar-year plans were considering either changing to a calendar year plan, which would mean having a short FSA plan year or coming into compliance as of the start of the plan year that ends in 2013. The IRS notice now makes it clear that non-calendar-year plans can wait to come into compliance until the plan year that begins in 2013.
Specifically, this notice provides that –
- the $2,500 limit does not apply to plan years that begin before 2013;
- the term “taxable year” applies to the plan year of the cafeteria plan;
- plans may adopt the required amendments to reflect the $2,500 limit at any time up to the end of calendar year 2014;
- in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year; and
- relief is provided for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.
- the statutory $2,500 limit applies only to salary reduction contributions under a health FSA, and does not apply to employer non-elective contributions (sometimes called flex credits), to any types of contributions or amounts available for reimbursement under other types of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan).
- if each of two spouses is eligible to elect salary reduction contributions to an FSA, each spouse may elect to make salary reduction contributions of up to $2,500 (as indexed for inflation) to his or her health FSA, even if both participate in the same health FSA sponsored by the same employer.
- if an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 (as indexed for inflation). However, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer’s health FSA.
In light of the $2,500 limit, the Treasury Department and the IRS are considering whether, for health FSAs, the position contained in proposed regulations that is referred to as the “use-or-lose” rule” should be modified. That rule generally prohibits any contribution or benefit under an FSA from being used in a subsequent plan year or period of coverage. Thus, under this rule, unused amounts in the health FSA are forfeited at the end of the plan year.
The $2,500 limit, while not addressing the use-or-lose rule, limits the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time. Given the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief (instead of, or in addition to, the current 2½ month grace period rule). Comments are requested on whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and, if so, how any such flexibility might be formulated and constrained. Comments are also requested on how any such modifications would interact with the $2,500 limit.
Comments must be submitted by August 17, 2012. Comments should include a reference to Notice 2012-40. Send submissions to CC:PA:LPD:PR (Notice 2012-40), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2012-40), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.email@example.com. Please include “Notice 2012-40” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.