June 12, 2012 (Indianapolis) - The Affordable Care Act set statutory limits on the amount of salary deferrals allowed under a health Flexible Spending Account (FSA), effective for taxable years beginning after December 31, 2012. However, there was confusion on exactly how this limit would apply. In Notice 2012-40, the IRS provided guidance on the application of the limit.
The $2,500 limit imposed is applied per taxable year. The term “taxable year” refers to the plan year of the cafeteria plan, not the tax year of the individual. The limit is first effective for the plan year beginning on or after January 1, 2013.
In addition, the limit only applies to salary reductions made under a health FSA and does not apply to employer contributions under a health FSA or employee contributions to other types of FSAs, health savings accounts, health reimbursement arrangements or premium conversion plans.
The limit applies on an employee-by-employee basis, regardless of how many dependents an employee has. However, if two spouses work for the same employer, each of them may elect up to $2,500 even if they participate in the same health FSA. In addition, if a person works for more than one employer, and those employers are not part of a controlled group, the person may utilize a separate $2,500 limit under each employer’s cafeteria plan.
Finally, plans may be amended retroactively to include the $2,500 limit, as long as the amendment is adopted at any time before December 31, 2014 and the plan has been operated in compliance with the dollar limit during the interim period.
If you have any questions regarding the application of the $2,500 limit to your plan, please contact your Nyhart consultant.