6/4/2012
On May 30, 2012 - nearly 6 months into 2012 - the IRS released Notice 2012-40 providing relief on numerous items related to the new $2,500 limit on participant contributions to health care flexible spending accounts. Unfortunately, for proactive non-calendar year plans this guidance may be too little too late.
Effective January 1, 2013, cafeteria plans may not permit plan participants to contribute more than $2,500 to a cafeteria plan "for any taxable year" (Internal Revenue Code Section 125(i)). The limit applies to 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 (commonly called "flex credits").
Until last week, "taxable year" was not defined. Therefore, the most conservative/cautious approach would be to assume the limit applied to the calendar year (the participants' taxable year) irrespective of a cafeteria's plan year* and under normal cafeteria plan rules, plans would need to be amended for the lower limit prior to the beginning of any plan year that begins in 2012 (and ends in 2013). Non-calendar year plans that began January - June of 2012 should have already amended for the $2,500 limit to help ensure the limit is not exceeded in 2013. Participants also must have already provided the plan with their elections for the plan year.
Notice 2012-40 provides relief for plans that have not been proactive; it provides a delayed effective date to amend plans and even provides relief for reasonable mistakes that cause a plan to exceed the limits. Unfortunately, there is no relief for plans that have been proactive. If a non-calendar year plan amended to lower its contribution limit to $2,500 early for ease of administration there is no guidance allowing plan participants to change their elections mid-year. It appears these plans must keep the $2,500 limit, as amended.*In fact, this approach would be consistent with how the term "taxable year" is typically used in the Internal Revenue Code. Taxable year is typically applied to the taxpayer affected - here, the participants are most affected and employees' taxable year is the calendar year. Notice 2012-40 refers to the Joint Committee on Taxation's explanations. The explanations provide the limit aplies "... for a plan year (or other 12-month coverage period)..."
For more information on many health care reform topics, see our "Health Care Reform Talk" blog at www.healthcare-legislation.blogspot.com.If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.