IRS' new guidance on $2,500 FSA cap: 5 keys

The Internal Revenue Service just issued guidance for employers and administrators of flexible spending accounts (FSAs) as they plan for the new rules that take effect in January 2013. 
As you know by now, the healthcare reform law contains a rule that annual contributions to FSAs will be capped at $2,500 beginning in 2013.
And the guidance clarifies these aspects of that rule:

  • The rule is effective for plan years starting on or after Jan. 1, 2013. The limit does not apply to plan years that begin prior to 2013.
  • Employer contributions do not count toward the $2,500 limit
  • The limit is per employee. If a husband and wife both work for the same employer, each may make contributions of $2,500 per year.
  • Grace period amounts from 2012 carried into 2013 do not count toward the limit. Plans can provide up to two months and 15 days in which salary contributions may be used by the employee before being subject to the “use-it-or-lose-it” rule, and the carryover does not count against the subsequent plan year’s $2,500 limitation.
  • If an employer, due to “a reasonable mistake,” allows an employee to contribute more than $2,500 out of his or her salary, and the mistake is corrected by the employer, the plan will not cease to be a valid plan.

The IRS also disclosed that it considering “modifying” its 28-year-old use-it-or-lose-it rule, because the $2,500 maximum limits the ability for individuals to defer large amounts of tax-free compensation into an FSA.
Info: IRS Notice 2012-40