IRS Issues Guidance for Applying FSA Limit

May 30, 2012 ( – The Internal Revenue Service (IRS) has issued guidance for applying the statutory limit for contributions to health flexible spending arrangements (FSAs) as set by the Patient Protection and Affordable Care Act.

Notice 2012-40 provides guidance about the effective date of the $2,500 limit (as indexed for inflation) under § 125(i) of the Internal Revenue Code and about the deadline for amending plans to comply with that limit.  The notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and that are corrected in a timely manner.    

Finally, the notice requests comments about whether to modify the use-or-lose rule that is currently set forth in the proposed regulations with respect to health FSAs.   

More specifically, the notice provides that: 

  • the $2,500 limit does not apply for plan years that begin before 2013;  
  • the term “taxable year” in § 125(i) refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made;   
  • plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014;  
  • in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year; and  
  • relief is 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.  


The IRS noted that the statutory $2,500 limit under § 125(i) applies only to salary reduction contributions under a health FSA, and does not apply to certain employer non-elective contributions (sometimes called flex credits), to any types of contributions or amounts available for reimbursement under other types of FSAs, health savings accounts, health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan).  

Notice 2012-40 is at