FSA Cap Update – Limited Relief Announced

June 2012Newsletters For Your Benefit

At the end of May, the Internal Revenue Service issued some welcomed guidance on the 2013 cap on employee contributions to health care flexible spending accounts (FSAs). The Affordable Care Act introduced a $2,500 annual limit on employee contributions to FSAs beginning in taxable years on or after January 1, 2013. “Taxable years” was previously undefined, so prudent plan sponsors of non-calendar year plans amended such plans to incorporate the $2,500 limit beginning in the 2012-2013 plan year. However, the IRS’ recent guidance indicates that such an approach is not necessary.

Specifically, IRS Notice 2012-40 provides relief for non-calendar year plans and makes it clear that the $2,500 limit applies to plan years beginning on or after January 1, 2013. Unfortunately, Notice 2012-40 does not provide any relief for plans that proactively amended to incorporate the limit for the 2012-2013 plan year.

In addition to the guidance regarding the limit’s effective date, the IRS guidance also made it clear that plan sponsors have until the end of calendar year 2014 to amend their plan, although the cap applies beginning in 2013 regardless. Ordinarily, cafeteria plan amendments may only apply prospectively; however, Notice 2012-40 provides an exception to such rule as it relates to the maximum contribution amount.

Notice 2012-40 also raises the possibility that the “use-it-or-lose-it” rule may be eliminated or amended some time in the not too distant future. Although there is currently no change to the fact that unused FSA contributions do not carry over if unused from one plan year to the next, the IRS acknowledges that it is considering a change in light of the $2,500 contribution cap. A change to this rule would be well received by plan participants and help reduce the risk of loss associated with FSA contributions.

If you have not already done so, you should speak to your benefits counsel regarding your cafeteria plan and timely amending it to comply with the FSA limit on participant contributions beginning in 2013.

For more information regarding this topic, please contact Seth I. Corbin or any member of the Fox Rothschild LLP Employee Benefits and Compensation Planning Practice Group.