IRS clarifies rules on health FSA contribution limits under ACA

Although there are currently no dollar limits on health FSA contributions, the Patient Protection and Affordable Care Act (PPACA) requires companies to limit pre-tax health flexible spending account (FSA) contributions to no more than $2,500 per calendar year. This law change is slated to take effect for “taxable years beginning after December 31, 2012.”


Many employers with non-calendar year FSAs, however, were fearful that they needed to act now to implement this limit, believing the $2,500 limit to be tied to the participant’s tax year, which is almost always the calendar year. However, these companies can now breathe a sigh of relief as the IRS has clarified the effective date of the $2,500 FSA limit. The reference to “taxable year” in the $2,500 limit rules refers to the plan year of the cafeteria plan, not the participant’s tax year, the IRS says, as this is the period for which salary-reduction elections are made.

Plan amendments required by end of 2014

In Notice 2012-40, the IRS has clarified that the $2,500 FSA limit does not apply for plan years that begin before 2013. In fact, the IRS indicates that employers may adopt any required plan amendments to reflect the $2,500 limit (or any lower limit specified in the plan) at any time through the end of the 2014 calendar year. An amendment to conform a plan to the $2,500 limit that is adopted on or before December 31, 2014, may be made effective retroactively, as long as the cafeteria plan is being operated in accordance with the plan limit rules for plan years beginning after December 31, 2012.
Relief for mistaken excess contributions

If one or more employees are erroneously allowed to make an FSA contribution of more than $2,500, the IRS is providing relief for relief if these excessive contributions are due to a reasonable mistake by the employer (or the employer’s agent) and not to willful neglect. This relief is available only if contributions exceeding the $2,500 limit are corrected, that is, paid to the employee and reported as wages on the employee’s W-2.

Special situations to note

In the case of an FSA providing a grace period (which may be up to two months and 15 days), unused salary-reduction 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.

If a plan has a short plan year, one with fewer than 12 months, which begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year.

Finally, in Notice 2012-40, the IRS has clarified that the statutory limit of $2,500 does not apply to flex credits, contributions available under other types of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee's share of health coverage premiums. In other words, the $2,500 limit applies only to salary reduction contributions under a health FSA, the IRS says.