• 2013 Plan Year Reduction in Health Flexible Spending Account Deferrals
  • October 4, 2012
  • Law Firm: Barnes Thornburg LLP - Indianapolis Office
  • One of the revenue raising provisions of the Patient Protection and Affordable Care Act (PPACA) provides that the maximum employee pre-tax salary deferral to a health flexible spending account (Health FSA) may not exceed $2,500 for plan years beginning after Dec. 31, 2012 (as indexed for inflation after 2013). Recently, the IRS issued guidance (Notice 2012-40) providing details on how this new limit works.

    Calendar year cafeteria plans (also known as code section 125 plans) may need to modify the salary deferral election forms for the plan year beginning Jan. 1, 2013 and fiscal year cafeteria plans must apply the new limit for the first plan year that begins in 2013. If the cafeteria plan has a short plan year (less than 12 months) then the $2,500 cap must be prorated accordingly.

    The $2,500 maximum employee pre-tax salary deferral limit applies only to salary reduction contributions under a Health FSA, and does not apply to any types of contributions or amounts available for reimbursement under health savings accounts or health reimbursement arrangements or under dependent care flexible spending accounts. The cap does not apply to the employee salary reduction contributions used to pay the employee’s portion of the health insurance premium nor the employee’s share for self-insured employer sponsored health plans.

    While employee pre-tax salary deferrals are subject to the cap, non-elective employer provided contributions (known as "flex credits") to the Health FSA are not subject to the $2,500 cap. For example, if an employer contributes a $500 flex credit, each employee may still elect to make pre-tax salary reduction contributions up to $2,500 to a Health FSA for that plan year.

    In the case of a plan providing a grace period (which may be up to two months and 15 days after the end of the plan year), unused employee pre-tax salary deferral 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.

    The Health FSA cap applies on an employee-by-employee basis, regardless of the number of other individuals health expenses are reimbursable under the employee's Health FSA. If each spouse is eligible to elect contributions to a Health FSA, each spouse may elect to make contributions up to the $2,500 cap, even if both participate in the same cafeteria plan sponsored by the same employer.

    If an employee participates in multiple cafeteria plans maintained by employers in a controlled group or affiliated service group, the employee’s total Health FSA is limited to the $2,500 limit. On the other hand, if an employee is employed by two or more employers that are not members of the same controlled group, such employee may elect up to $2,500 under each employer's Health FSA.

    Cafeteria plans must adopt the required amendment to reflect the $2,500 limit (or, at the employer’s option a lower limit) at any time through the end of calendar year 2014. Summary Plan Descriptions should be revised accordingly.

    If a cafeteria plan is not timely amended to comply with PPACA or fails to satisfy IRS regulations, the plan is not a cafeteria plan and employees’ elections between taxable and nontaxable benefits result in gross income to the employees.