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June 5 2012

New IRS Guidance on the $2,500 Limitation on Health FSA Plans

By: Timothy J. Tornga

The IRS just published timely and helpful guidance regarding implementation of the upcoming $2,500/year health FSA limit that is effective beginning in 2013. In a recent Client Alert, we notified clients and friends about some issues involved when implementing the Affordable Care Act limit of $2,500/year on Health Flexible Spending Accounts (FSAs). IRS Notice 2012-40 addresses the concerns raised in that message as well as other concerns.

First of all, for plans operating on a non-calendar year, the IRS issued very helpful advice by applying the new requirement on a plan year basis. This is contrary and more helpful than the calendar year or taxable year conclusion that many plan sponsors and employee benefit practitioners had assumed. For example, if a plan uses a July 1 to June 30 plan year and a participant elects $6,000 for the year ending June 30, 2013, that employee may continue making those contributions and enjoy plan benefits through June 30, 2013. The $2,500 limit applies to this plan beginning July 1, 2013.

Next, all plans must be amended to reflect the new limit, unless already adopted. The deadline for adopting the amendment is December 31, 2014, retroactive to January 1, 2013 or the first day of the plan year beginning after January 1, 2012, if later. Regardless of the date by which the amendment must be adopted, the plan must be operated in accordance with the limit beginning on the first day of the first plan year beginning on or after January 1, 2013.

What should a plan sponsor do to respond to the new requirement and new guidance?

  • Examine the plan document and make sure that some limit on contributions is currently expressed.
  • Mark your calendar to make sure the $2,500 limitation amendment is adopted by December 31, 2014.
  • Mark your calendar to make sure that the plan is operated in accordance with the limitation beginning on the first day of the first plan year beginning on or after January 1, 2013.
  • Monitor the news to see how this limitation is addressed by Supreme Court action or by Congress and respond accordingly. If your plan has already adopted the $2,500/year limit, be prepared to revise it if the Affordable Care Act is voided by the Supreme Court or Congress.

A couple of other issues were addressed in the IRS Notice. One is a description of acceptable corrective action in the event a plan inadvertently exceeds the limit.

The IRS also requested comments on possible modifications to the use-it-or-lose-it rule. This is an unnecessary but welcome signal of possible additional favorable changes. Repeating what we said above – monitor the news.

If you have question about this requirement or any other questions about your health care FSA plan, please call Tim Tornga at 616-632-8090 or one of the labor lawyers at our firm.

Related Newsletters
"New IRS Guidance on the $2,500 Limitation on Health FSA Plans," 6/6/2012