ANNUAL LIMIT COMES TO FLEXIBLE SPENDING ARRANGEMENTS

For plan years beginning after Dec. 31, 2012, salary reduction contributions to health flexible spending arrangements will have a statutory annual limit of $2,500.

Prior to the Pension Protection Act of 2006, no statutory limit existed for the amount of salary reduction contributions that employees could elect to contribute to their health FSAs, other than the limit imposed by the plan sponsor.

The IRS has issued guidance in Notice 2012-40 with the following provisions:

  • The $2,500 limit does not apply for plan years that begin before 2013.
  • The term "taxable year" refers to the plan year of the cafeteria plan - the period for which salary-reduction elections are made.
  • Plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014.
  • In the case of a plan 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.

The new guidance also provides relief for certain contributions that mistakenly exceed the $2,500 limit but are corrected in a timely manner. Relief is available if the excess is due to a reasonable mistake, not willful neglect, and the employer corrects the mistake.

 
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