2013 Health Care FSA Dollar Limit – Compliance Recommendation

Beginning January 1, 2013, the Patient Protection and Affordable Care Act will limit salary reduction contributions under a health care flexible spending account (FSA) during the taxable year to a maximum of $2,500. This new requirement applies to all health care FSA plans whose taxable years begin after December 31, 2012, even plans grandfathered under other provisions of health care reform.  The definition of “taxable year” refers to the employee’s taxable year and in most cases this means calendar year.  Thus, a calendar year limitation of $2,500 in salary reductions for the health care FSA will become effective January 1, 2013, regardless of the health care FSA plan year established by the employer.  

Due to the potential penalties for non-compliance (both for plan participants and the plan itself), employers need to develop a strategy for compliance with this provision of the law well before its 2013 effective date.  This is especially true for FSA plans that are not operated on a calendar year basis, which will face additional compliance challenges.  

Although there are several potential alternatives for complying with the calendar year limitation, IRS regulations requiring uniformity in cafeteria plan coverage and deferrals for all plan participants limit plan design flexibility in this area.  Therefore, for non-calendar year plans that currently allow a health care FSA election of more than $2,500, J.W. Terrill recommends that the plan be amended to adopt the new limit as of the first day of the plan year rather than waiting until January 1, 2013. An employer wishing to retain a higher dollar election limit for the remainder of 2012 can amend its plan to adopt a short plan year beginning on the renewal date and ending on December 31, 2012 and then begin operating the plan on a calendar year basis as of January 1, 2013.

This bulletin is strictly advisory.  It should not be intended as, nor should it be construed as legal advice. The information contained within does not imply or guarantee full compliance with Local, State, or Federal regulations.