Good News From The IRS Regarding FSA Medical Limit

Most recently the news from Washington has dampened the outlook for employers offering fringe benefits. The new SBC requirements and new PCOR fees due to start this fall (barring a complete rejection of the Health Reform Law by the Supreme Court in June) have created a haze over benefit plans.

However, a bright spot has emerged. On May 30th the IRS issued Notice 2012-40 (PDF) which simplified some requirements for the $2,500 FSA Medical Limit.  

The IRS clarified that the limit does not affect non-calendar year plans with a plan year beginning before January 1, 2013. Thus, a non-calendar year plan with the plan year beginning in 2012 is not subject to the limit until the plan renews in 2013. This requirement would have had an unfair impact on those enrolled in non-calendar year plans that began in 2012.

In addition to the start date clarification, the Notice addresses the following:

• Relief is provided for salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.
• The limit does not apply to Flex Credits/funds contributed by the employer nor does it apply to non-healthcare FSAs.
• Amendments to Plan Documents have been delayed until 2014.
• Funds rolling over into the new plan year due to the "grace period" provision will not count toward the $2,500 limit.
• If the employee and spouse are both covered under Cafeteria Plans (even if employed by the same employer) each can elect the $2,500 limit.
• The limit does not apply to HSAs, HRAs or health plan premium payments under a Section 125 Plan.
• The $2,500 limit must be pro-rated for the number of months when the plan is a short-plan year.

The Notice goes further to note that the Obama Administration is now considering a revision of the "use it or lose it" rule. The current mindset is that the limit now prevents Health FSAs from deferring excess compensation and limits the extent to which salary reduction amounts may accumulate over time. This may eventually replace or be in addition to the current 2.5 month grace period rule.

Also of note are the 2013 Health Savings Account Limits:

• Single Coverage contribution maximum is $3,250
• Family Coverage contribution maximum is $6,450
• HDHP (High Deductible Health Plan) minimum required deductible must be $1,250 for single coverage and $2,500 for family coverage
• Annual out of pocket expense must not exceed $6,250 for single coverage and $12,500 for family coverage

June will be a historic month-rest assured we will stay tuned in to keep you up to date.