IRS Releases Guidance on $2,500 Limit

May 30, 2012

The IRS released information recently that Health flexible spending arrangements are not subject to the $2,500 limit on salary reduction contributions for plan years beginning before 2013. Here are the highlights.

  1. The IRS Notice 2012-40 answers the question: "What defines a tax year in applying the Health FSA $2,500 limit?" The notice specifically states the cafeteria plan year is the "tax year." The notice determines that an "off calendar year" can fall into 2013 and still have an unlimited Health FSA amount.
  2. The 2.5-month grace-period extension does not apply toward the $2,500 limit.
  3. If an employee and spouse work at the same company, they are allowed to enroll for $2,500 each. Furthermore, spouses who work at different companies can each elect $2,500.
  4. The $2,500 Health FSA limit does not apply to premium conversion aka Premium Only Plans (POP), and other various options in a cafeteria plan, such as Dependent Care. 
  5. Amendments to plan documents are required for the $2,500 limit for all plans that start in 2013. eflex documents are amended, and current clients will receive updates at renewal.

Stunning news--The IRS is requesting input from taxpayers on how to construct a new "use or lose rule." Yes, you read it right. Taxpayers are encouraged to contact the IRS with feedback.

Download IRS Notice 2012-40 for more details.

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