Guidance on new $2,500 FSA Limit

The IRS released guidance in Notice 2012-40 on implementation by employers of the $2,500 annual limit on employee salary reduction contributions to health flexible spending arrangements (FSAs).  The $2,500 limit is effective for plan years beginning after December 31, 2012, and is indexed for inflation in subsequent years.  Specifically, the guidance provides that:

• The limit is per employee.  If a husband and wife both work for the same employer, each may make contributions of $2,500 per year.
• The limit applies to all employers that are treated as a single employer under IRS Code Sec. 414 as a controlled group or affiliated service group.
• 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.
• If, by a reasonable mistake, an employer or agent allows an employee to elect a salary reduction exceeding the maximum, and the excess is paid to the employee and reported as wages on Form W-2, the cafeteria plan will not cease to be a valid plan for that plan year
• The $2,500 limit does not apply for plan years that begin before 2013.
• The term “taxable year” refers to the plan year of the cafeteria plan as this is the period for which salary-reduction elections are made.
• Plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014.

If you have any further questions, please contact Bergan Paulsen.