IRS Guidance on $2,500 FSA Limit

June 13, 2012

This is part of our series of alerts intended to help guide employers and plan sponsors through their new obligations under the health care reform laws and related guidance. The IRS recently issued Notice 2012-40 (the “Notice”), which provides guidance on how the limit on contributions to health care flexible spending accounts (“FSAs”) applies. The health care reform laws require that the amount of salary reduction contributions to an FSA be limited to $2,500 (indexed for inflation) effective for “taxable years” beginning after December 31, 2012. Plan sponsors who have non-calendar year FSAs have been trying to determine how to apply these limits to their plan years ending in 2013, with little guidance.

The Notice provides that, for purposes of this $2,500 cap, “taxable years” means the FSA’s plan year. This means that the $2,500 limit will apply on a plan year basis, effective for plan years beginning after December 31, 2012. Thus, for non-calendar year plans, plan sponsors will not need to worry about the $2,500 cap until next year, and then they will need to apply the cap only to the plan year.  For example, a FSA with a July 1 – June 30 plan year will not need to limit contributions to $2,500 until July 1, 2013. Note that the limit is indexed for inflation, and a plan sponsor is permitted to specify a limit lower than $2,500.

For calendar year FSAs, this guidance has little impact and the $2,500 limit will take effect on January 1, 2013. 

The Notice also provides a grace period to amend FSAs to include the $2,500 limit – amendments must be adopted by December 31, 2014. However, the FSA must comply in operation with the limit and the Notice prior to the amendment. 

The Notice also provides the following guidance:

Print PDF