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IRS Provides Guidance on $2,500 Health FSA Limit

June 7, 2012

The provision of the Patient Protection and Affordable Care Act, which limits employee contributions in a Health Flexible Spending Account to $2,500 (effective January 1, 2013), was addressed by the IRS last week.

On Wednesday, May 30, 2012, the IRS issued Notice 2012-40 which provides transition relief to non-calendar-year FSA plans beginning before January 1, 2013. The notice clearly establishes that the $2,500 limit requirement does not apply to plan years that begin before 2013. While this clarification goes against previous information that was issued, it may prove helpful for those non-calendar-year plans looking to keep a higher limit for one final plan year.

If you offer a Flexible Spending Account to your employees and your plan year renews on January 1, 2013, your plan will remain at the current Health FSA maximum established in your plan document for the 2012 plan year and will be capped at $2,500 starting in 2013. If your plan is a non-calendar-year plan, Notice 2012-40 allows you to take advantage of the transitional relief and keep your existing limit in the plan through your plan year that ends in 2013. The Notice further explains that all plans, regardless of plan year, must be amended with the new limits by 2014.

Notice 2012-40 also reiterated these additional concerns regarding the contribution limit:  

  • FSA plans may offer the two and a half month Grace Period to use up remaining funds from the previous year. Any funds from the previous year used in the Grace Period will not count against the $2,500 contribution limit applicable to the following plan year.
     
  • The $2,500 contribution limit does not apply to the Dependent Care, Parking and Transit benefits, as well as any employer contributions to the Health FSA.
     
  • The $2,500 contribution limit does not apply to an employee’s contributions to a cafeteria plan used to pay for a share of health coverage premiums, contributions to a Health Savings Account (HSA) or to amounts made available by the employer through a Health Reimbursement Arrangement (HRA).
     
  • If both spouses have an FSA available, each can fund his/her health FSAs to the full amount of the cap. In addition, if an individual is employed by two separate employers who are not members of the same controlled group or affiliated service group (as defined by the IRS), he or she may establish and fund an FSA at each employer up to the amount of the cap.

If you would like to learn more, please do not hesitate to contact Sentinel Benefits at 888-762-6088, option 2. Thank you for partnering with Sentinel Benefits & Financial Group.