Hunton Employment & Labor Perspectives

Is your cafeteria plan ready for the new health care flexible spending account (FSA) employee contribution limit?  Beginning in 2013, the Patient Protection and Affordable Care Act (ACA) limits the maximum amount that an employee can elect to contribute to a health care flexible spending account (FSA) to $2,500 per year.  While plan sponsors could, prior to ACA, impose limits on the amount of elective employee contributions to a health care FSA, there was no statutory limit.

The IRS has just issued guidance on the application of this limit.  Here is a quick synopsis of the key points of that guidance:

• The annual limit is effective for health FSA plan years that begin after 2012 -- so, for a health care FSA arrangement that has a noncalendar plan year, the limit will not go into effect until the first day of the plan year beginning in 2013 (e.g., for a July 1–June 30 plan year, the limit would go into effect for the plan year beginning July 1, 2013).
• In addition, for FSA arrangements that use the 2½ month "grace period", unused contributions that are carried over to the grace period will not be counted against the $2,500 limit for the plan year in which the grace period falls. For example, if an employee has $500 in unused contributions at the end of 2012 plan year, the $500 grace period carryover will not be counted against the employee's contribution limit for the 2013 plan year.
• The limit only applies to elective employee contributions and, therefore, does not extend to employer matching or other non-elective FSA contributions (unless the employee can elect to receive that amount as either cash or a taxable benefit). Thus, employer contributions of this sort can be made even if they exceed (in combination with any employee elective contributions or otherwise) the $2,500 limit.
• Dependent care assistance plans, health savings accounts, health reimbursement arrangements, adoption care assistance and elective “premium conversion” contributions for health coverage are not subject to the $2,500 contribution limit.
• The annual $2,500 contribution limit will be adjusted from time to time for changes in the cost of living.
• Cafeteria plan documents will need to be amended to reflect the new limit no later than December 31, 2014 (two years after the limit first goes into effect), which represents a substantial relaxation of the normal timeframe for making changes of this sort. Thus, the required amendments can be adopted retroactively on or before December 31, 2014, provided the cafeteria plan has operated according to the new requirements.