June 11, 2012
The Affordable Care Act (ACA) imposes a $2,500 limit on salary reduction contributions to a health flexible spending account (FSA) offered under a cafeteria plan. This limit is applicable to grandfathered and non-grandfathered health FSAs. ACA provides that this change is effective for taxable years beginning after Dec. 31, 2012. The $2,500 limit will be indexed for cost-of-living adjustments for 2014 and later years.
Because ACA ties the effective date of the health FSA limit to the taxable year, and not specifically to the plan year, there has been some confusion regarding when the limit becomes effective for non-calendar year plans. In addition, the deadline for amending cafeteria plans to include the health FSA limit has also been unclear. On May 30, 2012, the Internal Revenue Service (IRS) issued Notice 2012-40 to provide guidance on these issues and some others related to the $2,500 limit for health FSAs.
The IRS Notice states that the $2,500 health FSA limit does NOT apply for plan years that begin before 2013. Instead, the IRS has clarified that the limit applies on a plan year basis and is effective for plan years beginning after Dec. 31, 2012. Thus, for a calendar year plan, the limit will become effective on Jan. 1, 2013.
A cafeteria plan with a health FSA must be amended to include ACA’s $2,500 limit (or a lower limit at the employer’s option). In general, cafeteria plan amendments cannot be made retroactively. However, the IRS sometimes provides exceptions to this rule. Cafeteria plans with health FSAs must be amended for ACA’s $2,500 limit on or before Dec. 31, 2014. To take advantage of the delayed amendment deadline, the cafeteria plan must comply in operation with ACA’s limit for health FSAs for plan years beginning after Dec. 31, 2012.
Under the IRS’s interpretation of the law, you will not be required to comply with the $2,500 health FSA limit until the first day of your plan year after December 31, 2012. For example, a health FSA with a July 1 plan year will not need to comply with ACA’s limit until the plan year beginning July 1, 2013. Having the health FSA limit tied to the plan year will simplify the administration of this limit for your non-calendar year plan. Plus, don’t forget to amend your plan documentation.
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