A provision of the Patient Protection and Affordable Care Act that is slated to take effect on January 1, 2013, limits Flexible Spending Account contributions to $2,500 per tax year. On May 30th, the IRS issued Notice 2012-40, which provides transition relief to non-calendar-year FSA plans by clearly establishing that the requirement does not apply for plan years that begin before 2013 and that the term “taxable year” in the law refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made.
In addition to the start-date clarification, the guidance addresses plan grace periods and provides relief for “certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.” Further, the notice clearly establishes that the limit in PPACA does not does not apply to certain employer non-elective contributions (sometimes called flex credits), nor does it apply to non-healthcare FSA contributions, HSAs, HRAs or health plan premium payments made under a Section 125 plan.
The IRS also announced that in light of the $2,500 limit, the Obama Administration is considering whether, for health FSAs, the position that is often referred to as the “use or lose” rule” should be modified. In the guidance it states, “The $2,500 limit, while not addressing the ‘use or lose’ rule, limits the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time. Given the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief (instead of, or in addition to, the current 2½ month grace period rule).” The administration is requesting comments on the issue to be submitted by August 17,