May 30, 2012, the IRS issued guidance in the form of Notice 2012-40 regarding the $2,500 limit for General-Purpose and Limited-Purpose Medical Flexible Spending Account (FSA) salary reductions.  This helps clarify some of the uncertainties in the provision of the Affordable Care Act set to start in 2013.  It is especially good news for non-calendar year flexible benefit plans, which until now did not know how the $2,500 cap would apply to their plans.  

In light of the $2,500 limit, the Treasury Department and the IRS are considering whether, for health FSAs, the position contained in proposed regulations that is often referred to as the “use-or-lose” rule should be modified. That rule generally prohibits any contribution or benefit under an FSA from being used in a subsequent plan year or period of coverage. Thus, under this rule, unused amounts in the health FSA are “forfeited” at the end of the plan year.

The Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief (instead of, or in addition to, the current 2½ month grace period rule). Comments are requested on whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and, if so, how any such flexibility might be formulated and constrained. Comments are also requested on how any such modifications would interact with the $2,500 limit.

Currently, there is some bipartisan legislative activity in this area in bills H.R. 1004/S. 1404, the Medical FSA Improvement Act as introduced by Reps. Boustany (R-LA) and Larson (D-CT) and Sens. Cardin (D-MD) and Enzi (R-WY).

If your employees have cited the Use-Or-Lose Rule as the reason not to participate in FLEX, here is your chance to influence change!  Don’t miss out on this chance to help eliminate (or at least modify) this unpopular rule by sending your comments to the IRS by the August 17^th deadline.  See the instructions below.

Comments must be submitted by August 17, 2012. Comments should include a reference to Notice 2012-40. Send submissions to CC:PA:LPD:PR (Notice 2012-40), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2012-40), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC

To read the Notice in its entirety click here Notice 2012-40 or go to http://www.irs.gov/pub/irs-drop/n-12-40.pdf

Please feel free to contact our offices at 800-342-8235 or 800-554-7213 if you have any questions or concerns.