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
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
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.
Please contact us if we can be of assistance in amending your
cafeteria plan and summary plan descriptions.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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