Blog By: Beth Ede, SPHR
This may sound like a contradiction, but there’s some good news from the IRS. On May 30th, the IRS released additional guidance on the upcoming health FSA limits for 2013 and beyond. The additional guidance comes in the form of Notice 2012-40.
In a nutshell, here is an abbreviated summary of some of the highlights:
- Employers with fiscal year health FSAs may keep higher reimbursement limits in effect through the end of their 2012-2013 plan year
- Employers may adopt retroactive plan amendments to impose the $2,500 limit at any time before December 31, 2014 and maintain compliance
- The term “taxable year” will refer to cafeteria year plan – not the individual participant’s tax year
- This means that reimbursements that exceed $2, 500 can remain in effect for a calendar year beginning any time in 2012 – including a December 1, 2012 to November 30, 2013 plan year
- The $2,500 limit goes into effect for plan years beginning after December 31, 2012 – meaning all calendar year plans as of January 1, 2013 and fiscal year plans beginning February 1, 2013 and after
- The $2,500 limit will be indexed for inflation beginning in 2014 and thereafter
- Plan years can only be changed for valid business reasons – not just to avoid the new limit for 2013, and short plans years must be pro-rated
- Employer contributions under a cafeteria plan (often called “flex credits) will count toward the $2,500 max and reduce the employee’s salary deferral limit if the employee can elect to receive the “flex credits” as cash or as a taxable benefit – however, flex credits that are only usable within the FSA for eligible medical expenses will not offset the $2,500 limit
- If there is a grace period for the FSA, the amounts allowed in an established grace period (not to exceed 2 ½ months into the next plan year) do not count against the $2,500 limit for the subsequent plan year
In addition, the IRS has made a request for public comment on whether modifications to the “use-it-or-lose-it” rule are in order given the new dollar limit on annual reimbursements.