February 3, 2012  
Limit Imposed on Health Flexible Spending Accounts in 2013 Will Impact Non-Calendar Year Plans This Year

Healthcare Reform sets a limit on salary deferrals that may be made under a health flexible spending account (health FSA) to $2,500 in the "taxable years" beginning on or after January 1, 2013. Under the law, the term "taxable year" refers not to the "plan year" but to the "taxable year of the employee" participating in the health FSA.

An employee's "taxable year" will be the calendar year. For health FSAs that run on a calendar year basis, this contribution limitation will be required for the 2013 plan year, so calendar year Health FSA plans that currently allow maximum contributions greater than $2,500 will be able to continue to do so for the 2012 plan year, but must revise the terms of the Health FSA to permit a maximum salary deferral of $2,500 in 2013.

However, for fiscal (non-calendar) year Health FSAs that will span both the 2012 and 2013 taxable years, the $2,500 annual contribution limit raises an important issue because of the chance that the minimum amount will be met within the calendar year.

If your health FSA is not a calendar year plan, then there is a chance that your plan year will overlap into 2013. In fact, the first fiscal (non-calendar) plan year that will overlap with 2013 begins on
February 1, 2012 (ending January 31, 2013). This "transitional" plan year will impact elections made for plan years beginning February 1, 2012. Fiscal year plans that currently permit salary deferrals in excess of $2,500 must ensure that deferrals occurring over the 2013 calendar year do not exceed the $2,500 limit.

The easiest way to show the issue is through an example:

  1. Health FSA plan year is March to February.
  2. From January 2013 to the end of February 2013, the participant contributes $500 to a Health FSA based on an election made in March of 2012.
  3. The participant elects $2,500 (new set maximum under Healthcare Reform) as of March 2013.
  4. Deductions in taxable year 2013 can be no more than $2,000 as $500 was already deducted in previous plan year months of January and February 2013. This will total $2,500 for the taxable year.

A health FSA plan that permits more than $2,500 to be contributed may be subject to penalties or disqualification.

There is no current guidance from the IRS on applying the new dollar limit to a fiscal year plan. If such guidance is issued, Corporate Synergies will provide you with an update. Until then, it appears that there are a few options to avoid this issue for non-calendar year plans:

  1. Imposing the $2,500 dollar limit as of the beginning of the 2012-2013 fiscal plan year; or
  2. Allowing the current rate of deferrals to continue into 2013, but cutting off the salary deferrals as soon as the $2,500 dollar limit is reached.

Whichever option you intend to use should be communicated to plan participants and the company's payroll department and/or third party payroll providers. This will support a smooth transition into compliance with the new dollar limit that is applicable as of January 1, 2013 and beyond.

If you have any additional questions regarding the information within this eCommunication, please call Corporate Synergies at 1.866.CSG.1719 or CLICK HERE to contact us today.

Corporate Synergies is pleased to provide regular updates on issues affecting group benefits insurance. As an insurance broker and consultant, Corporate Synergies is proactive in monitoring federal and state legislative and regulatory activity to ensure that you stay informed. Our customers call us their "Dedicated Advocates." We work on your behalf.

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NOTE: This communication is in no way intended to substitute for legal advice. Please contact your attorney for advice about employment law issues.
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