BREAKING NEWS FOR SECTION 125 PLAN SPONSORS!
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.
The summary of some of the key points:
- The $2,500 cap will be effective with the first plan year on or after December 31, 2012. The term "taxable year" in Section 125(i) refers to the plan year of the cafeteria plan. Therefore, any non-calendar year plan renewing currently in 2012, will not need to impose the limit until the plan renews for the first time in 2013.
- The $2,500 cap is per employee/per employer rule.
- The employee limit is without regard to whether or not the employee is single or has other qualified family members covered under the FSA (i.e. spouse, dependents, adult children).
- In the case of a married participant, where both have access to a plan that offers a General-Purpose or Limited-Purpose Medical FSA, each spouse can elect to reduce his/her salary up to a maximum of $2,500. There is no married limit, like with the Dependent Care FSA.
- If an employee (or employee’s spouse) works for more than one employer, that is not part of a control group (multiple employers with common ownership), the employee (or employee’s spouse) can elect up to $2,500 under each employer plan.
- If an employee (or employee’s spouse) works for more than one employer that is part of a controlled group (multiple employers with common ownership) or affiliated service group, the employee’s (or employee’s spouse), then the participant limit will be subject to an aggregate of $2,500 overall.
- Short plan years. In the case of a short plan year, the $2,500 limit must be prorated based on the number of months in the short plan year.
- Change in the plan year must be for valid business reasons. The Notice indicates that an employer cannot change their plan year cycle solely to delay implementing the $2,500 cap.
- Indexing of the $2,500 limit applies to plan years beginning after December 31, 2013. The $2,500 limitation is indexed to CPI–U beginning in 2014, with minimal increases to the limit expected in the future.
- Employer contributions disregarded. For purposes of the $2,500 cap, only salary reductions (including cashable credits) are taken into consideration. The limit does NOT apply to non-elective contributions (employer contributions, sometimes called flex credits) that cannot be cashed out or received in the form of taxable benefits.
- Grace Period (Optional 2 ˝ months added to end of plan year). Unused amounts carried over during a grace period from a prior plan year are not counted toward the $ 2,500 limit.
- No other flexible benefit plan options impacted. Pre-tax deductions for qualified premiums, Dependent Care FSA, Individual Premium FSA, or HSA contributions will be disregarded for purposes of the new $2,500 cap and will not be impacted by this rule.
- Mistakes. For a cafeteria plan that has complied with the written requirement limiting the General-Purpose and Limited-Purpose Medical FSA, there is relief provided for certain 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.
- Employer corrections. Salary reductions in excess of the $2,500 (as indexed for inflation) are paid to the employee and reported as wages for income tax withholding and employment tax purposes on the employee’s Form W-2, Wage and Tax Statement (or Form W-2 c, Corrected Wage and Tax Statement) for the employee’s taxable year in which, or with which, ends the cafeteria plan year in which the correction is made. The relief is not available if the employer’s federal tax return is under examination with respect to the benefits provided under the cafeteria plan for the particular plan year that the mistake has occurred.
- Written plan amendment is required to comply. According to the Notice, plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of the calendar year 2014.
Note: Benefits Design Group, Inc. will automatically prepare the necessary amendments for our clients and will send to them to coincide with the renewal impacted by the cap at no additional charge. No action is required by the employer to initiate the amendment.
To view the Notice in its entirety: www.irs.gov/pub/irs-drop/n-12-40.pdf
Call Benefits Design Group, Inc. at 1-800-342-8235 or 1-800-554-7213 if you have questions or concerns!