Health FSA Contribution Limits
The Internal Revenue Service (IRS) issued Notice 2012-40 clarifying the Health Care Reform law’s $2,500 limit for salary reduction contributions to Health Flexible Spending Accounts (Health FSAs). Although the $2,500 limit is not scheduled to take effect until January 1, 2013, many plan sponsors with non-calendar year cafeteria plans wondered whether and how the limit would be applied to plan years beginning in 2012. The notice clarifies that:
- the $2,500 limit applies only to salary reduction contributions, not to other employer contributions such as flex credits;
- the $2,500 limit does not apply to cafeteria plan years beginning before January 1, 2013 (but the IRS says a plan sponsor can’t change their plan year merely to delay the $2,500 limit);
- the $2,500 limit applies separately to each individual who is eligible to participate in a Health FSA; if each spouse is eligible to participate in a Health FSA through the same or different employers, each spouse can separately contribute $2,500;
- unused salary reduction contributions to a health FSA for a plan year beginning in 2012 or later that are carried over to the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year ;
- plan sponsors can amend cafeteria plans retroactively to reflect the $2,500 limit at any time through December 31, 2014, however, the plan cannot allow a participant to make salary reduction contributions for a plan year beginning January 1, 2013 and after in excess of the $2,500 limit; 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.
Health FSA Contribution Limit Hot Topics & FAQs
- Does the limit take effect January 1, 2013, or the first plan year beginning on or after January 1, 2013?
Answer: The Department of Treasury published guidance in Notice 2012-40, providing the limit is effective for plan years beginning after December 31, 2012.
- Are spouses who work limited to combined $2,500 Health FSA contribution?
Answer: No. Each employee is limited to a $2,500 Health FSA contribution per employer (or smaller amount if the employer’s plan has a lower limit).
- Can employers change a $2,500 health FSA contribution limit for a 2012 cafeteria plan year that has already begun and let existing participants change their elections?
Answer: No, not unless the IRS issues additional guidance permitting this change. The existing regulations would not permit existing participants to make a mid-year election change in these circumstances.
Employers with 2012 cafeteria plan years that have not yet begun are not required to limit Health FSA contributions to $2,500 for their 2012 plan year. Notice 2012-40 clarifies these employers can wait to implement the $2,500 health FSA contribution limit for the cafeteria plan year beginning in 2013. For example, if an employer’s cafeteria plan year begins August 1, 2012, the plan can have a Health FSA contribution limit higher than $2,500 for the 2012 plan year. For the plan year beginning August 1, 2013, the employer must reduce the plan’s Health FSA contribution limit to $2,500 or lower.
American Fidelity Assurance Company does not provide tax or legal advice.