Statutory limit on FSA is plan-year specific

Previously, it was unclear whether the new $2,500 statutory limit on health FSA contributions applied on a plan- or calendar-year basis. A reading of Section 10902 of Patient Protection and Affordable Care Act appeared to mean the requirement would go into effect on Jan. 1, 2013, regardless of the plan year.

This interpretation was problematic for plan years that straddle two calendar years, because it would mean employees would be making their election in 2012 for the 2013 calendar year, and the contributions would not be limited in 2012, but they would be in 2013. Because of this difficulty, some third-party administrators required employers to lower the limit on the health FSA prematurely. Others opted to wait until guidance was issued.

The IRS issued the anticipated guidance on May 30 in IRS Notice 2012-40. In the guidance, the IRS clarified that the effective date of the new $2,500 statutory limit would apply on a plan-year basis, for the first cafeteria plan year beginning on or after Jan. 1, 2013. This will make it much easier for those plan years that straddle two calendar years to comply. Unfortunately, employers who amended their plans early during 2012 may not allow individuals to change or increase their health FSA contributions for the rest of the 2012 cafeteria plan year.

This is because even if the plan was amended midyear, there would be no applicable qualifying event permitting individuals to change or increase their contributions to the health FSA. The guidance did not provide for any relief or exception.

Employers that previously had a higher limit or no limit must amend their cafeteria plan documents to reflect the change in the law. They must also communicate the change to employees and ensure employees are contributing no more than $2,500 in salary reduction contributions.

Within Notice 2012-40, the IRS allowed plans to have until Dec. 31, 2014, to retroactively amend their plan documents to reflect the new health FSA limit, as long as the plan is otherwise operating in accordance with the requirements outlined in the notice.