|Health care reform imposes a new $2,500 limit on annual salary reduction contributions to health FSAs offered under cafeteria plans. When is this change effective?
Under Code Section 125(i), as amended by PPACA, Pub. L. No. 111-148 (2010) and HCERA, Pub. L. No. 111-152 (2010), this change is effective for taxable years beginning after December 31, 2012. Code Section 125(i) also provides that in order for the health FSA to be a qualified benefit under the cafeteria plan, it must be set forth in the applicable plan documents. Code Section 125(i)(2) provides that the $2,500 amount will be indexed for inflation for taxable years beginning after December 31, 2013. All health FSAs offered under cafeteria plans must comply with this new requirement. For purposes of the limit, the IRS indicated in Notice 2010-38 that the term “taxable year” refers to the taxable year of the employee participating in the health FSA. In most cases, this will be the calendar year. Thus, it appears that the $2,500 limit is effectively a calendar-year limitation that applies beginning January 1, 2013. For plans that currently permit health FSA salary reductions in excess of $2,500, plan amendments and changes to employee communications will be required before the January 1, 2013 effective date. This new $2,500 limit raises special issues for non-calendar-year health FSAs. The plan administrator must monitor compliance with the limit on a calendar-year basis. These non-calendar year plans must be advised to take the limit into account when conducting enrollment for the plan year that includes the January 1, 2013 effective date.
If you are a current client and would like to find out more about your FSA, click here.