1/13/2012This article was updated June 1, 2012. See the article Cafeteria Plan Relief for $2,500 Limit Too Late for Many Plans for more information.
Two health care reform requirements apply to cafeteria plans in 2013 but plan administrators may need to start planning for these changes this year. The first is a new annual limit on employee contributions to health FSAs. The second is W-2 reporting of employer contributions to Health FSAs. Each is described in more detail below.
Annual Limit on Health FSA Contributions
Update: On May 30, 2012 the IRS released Notice 2012-40. This Notice clarifies the FSA contribution limit applies to plan years that begin on or after January 1, 2013.
Effective January 1, 2013, Cafeteria plans may not permit Participants to contribute more than $2,500 to a cafeteria plan per year via salary reduction. The limit is tied to inflation and may increase each year. This limit is a limit on salary reduction contributions only. Employers can contribute additional amounts to a Health FSA on behalf of employees if the employees do not have the option to take the employer contribution as cash ("flex credits").
Note for ftwilliam.com cafeteria plan users: if plan sponsors have adopted our PPACA amendment (released September 24, 2010) or have restated the plan on or after that date, you do not need to amend your plans if you wish to use the limit required by the Internal Revenue Code. The amendment/current document automatically provides that the plan will limit the maximum salary reduction permitted under Code section 125(i) as of January 1, 2013 ("As of January 1, 2013, [the plan] may not exceed the maximum permitted under Code section 125(i) ($2,500 in 2013).").
W-2 Reporting for Cafeteria Plans
Most large employers with employer contributions to health care FSAs as part of a cafeteria plan must begin reporting the cost of this coverage on 2012 W-2s. This reporting won't actually happen until early 2013, but employers should consider how cafeteria plans operate in order to determine how the contributions are reported. Many employers may be aware that they need to begin reporting the cost of major medical plans but employers should be informed that employer contributions to health FSAs also need to be included when W-2 reporting.
Background and Timelines
The Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act (together known as PPACA) added the requirement for employers to report the cost of group health insurance coverage beginning in 2011. IRS has phased in the reporting requirements. In 2011 reporting was optional. In 2012 it is required only for employers that filed at least 250 2011 W-2s. In 2013 it will be mandatory for all affected plans/employers. The IRS has recently described the requirements in detail in Notice 2012-9.
Although many of the health care reform changes are tied to whether the plan is covered by HIPAA Portability, this requirement is not. The reporting affects cafeteria plans that are subject to federal continuation coverage requirements (COBRA, ERISA, and/or the Public Health Service Act and the temporary continuation coverage requirement under the Federal Employees Heatlh Benefits Program).
However, the following are not subject to the reporting rules:
- coverage provided by a government under a plan maintained primarily for members of the military and their families,
- Dental or vision plan that is not subject to HIPAA Portability,
- HRA plans, and
- contributions to HSAs or Archer MSAs,
Reporting for Cafeteria Plans
Cafeteria plans must report the amount of the employer contribution to the Health FSA if it exceeds the employee's salary reduction to the Health FSA. The IRS provided several helpful examples in Notice 2012-9 to calculate the amount reported on the employer's W-2:
Example 1 [No employer flex credits; no reported amount]: Employer maintains a section 125 cafeteria plan that offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan permits contributions only through employee salary reduction elections, and does not offer any employer flex credits. Employee makes a $2,000 salary reduction election for several qualified benefits under the plan, including a health FSA for $1,500. For purposes of reporting on Form W-2, none of the health FSA amount is included for purposes of determining the aggregate reportable cost.
Example 2 [employer flex credits]: Employer maintains a section 125 cafeteria plan that offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan offers an employer flex credit of $1,000. Employee makes a $2,000 salary reduction election for several qualified benefits under the plan, including a health FSA for $1,500. The cost of the qualified benefits for Employee under the plan for the year is $3,000. The amount of Employee's salary reduction election ($2,000) for the plan year equals or exceeds the amount of the health FSA ($1,500) for the plan year. Thus, for purposes of reporting on Form W-2, none of the health FSA amount is permitted to be included for purposes of determining the aggregate reportable cost.
Example 3 [matching employer flex credits]: Employer maintains a section 125 cafeteria plan that offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan offers a flex credit in the form of a match of each employee's salary reduction contribution. Employee makes a $700 salary reduction election for a health FSA. Employer provides an additional $700 to the health FSA to match Employee's salary reduction election. The amount of the health FSA for Employee for the plan year is $1,400. The amount of Employee's health FSA ($1,400) for the plan year exceeds the salary reduction election ($700) for the plan year. The employer must include $700 ($1,400 health FSA amount minus $700 salary reduction) in determining the aggregate reportable cost.
For more information on many health care reform topics, see our "Health Care Reform Talk" blog at www.healthcare-legislation.blogspot.com.
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