Employee Benefits-IRS Provides Guidance On $2,500 Health FSA Limit And Other Cafeteria Plan Matters

In Notice 2012-40, the Internal Revenue Service (the “IRS”) provides guidance on the $2,500 limit on the amount of salary reduction contributions that may be made to a health flexible spending arrangement (a “health FSA”) under § 125(i) of the Internal Revenue Code (the “Code”) and the deadline for amending cafeteria plans to comply with that limit.

Specifically, the Notice provides that –

• the $2,500 limit does not apply for plan years that begin before 2013(that is, the limit applies to plan years starting after 2012);

• the $2,500 limit applies on an employee by employee basis;

• the term “taxable year” in § 125(i) refers to the plan year of the cafeteria plan, as
this is the period for which salary reduction elections are made and the period to which the $2,500 limit will apply (the $2,500 amount will be indexed for inflation for plan years starting after 2013) ;

• plans may adopt the required amendments to reflect the $2,500 limit at any time
through the end of calendar year 2014 (but the amendment must be retroactive to the effective date of the limit and the plan must be operated in accordance with the limit); and

• in the case of a plan providing a grace period for unused salary reduction contributions (which may be up to two months and 15 days), for plan years beginning after 2011, unused salary reduction contributions to the health FSA for a plan year, which are carried over into the grace period for that plan year, will not count against the $2,500 limit for the next plan year.

The Notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and are corrected in a timely manner. Finally, the Notice requests comments on whether to modify the use-or-lose rule that currently applies to health FSAs.