Exec Summary - FSA Contribution Limit

Health Flexible Spending Arrangements (FSAs) Limits Under PPACA

Who:  All group health plans qualifying for and allowing employees under a cafeteria plan to utilize Flexible Spending Arrangements (FSAs).

What:   PPACA requires health FSAs that are part of a cafeteria plan to limit employees’ salary reduction contributions to $2,500 annually.  The $2,500 limit Does Not apply to:
  • Employer non-elective contributions (so called flex credits);
  • Reimbursement under other employer provided coverage, such as:
    • Dependent care FSA;
    • Adoption care assistance;
    • Employee’s share of health coverage premiums;
    • Health savings account employee contributions;
    • Health reimbursement arrangement employer contributions

 When:  PPACA identifies “taxable years” beginning after December 31, 2012. The IRS interprets “taxable year” to mean “plan year.” The $2,500 limit is effective for plan years beginning after December 31, 2012, with cost-of-living adjustments for plan years beginning after December 31, 2013.

 Executive Summary:  The Internal Revenue Service (IRS) issued a Notice (2012-40) providing 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. The IRS clarified the following:

     •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;

    • 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 certain 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).

 Actions:  Employers should check with their insurance brokers, agents, consultants, and insurers in preparation for the 2013 FSA limits.  FSAs, HSAs and HRAs are at the core of the health reform debate.   Employers should stay alert to changes that may impact FSAs as a result of other considerations under review by the IRS, the Supreme Court decision on the constitutionality of PPACA, and the direction of health care reform following the 2012 elections may impact the use of FSAs.      

 The information presented and contained within this article was submitted by Ronald E. Bachman, President & CEO of Healthcare Visions. This information is general information only, and does not, and is not intended to constitute legal advice. You should consult your legal advisors to determine the laws and regulations impacting your business. Any opinions expressed within this document are solely the opinion of the individual author.