SECOND OPINIONS: ACA Cap on Contributions to Health FSAs

July 18, 2012 (PLANSPONSOR.com) - The Patient Protection and Affordable Care Act (ACA) caps salary reduction contributions to health flexible spending arrangements (FSAs) at $2,500 beginning in 2013.
By PS

The IRS recently released Notice 2012-40 (Notice), which provides guidance on the application of the cap.  Below we answer some of the most frequently asked questions we have received regarding the ACA health FSA cap.  

What is the effective date of the FSA cap?   

The ACA states that the FSA cap is effective for “taxable years” beginning after December 31, 2012, but did not specify the applicable year to which it applies (i.e., the plan year or the employee’s taxable year).  The Notice clarifies that the FSA cap applies to “plan years” beginning after December 31, 2012.     

When must an employer’s cafeteria plan be amended to incorporate the FSA cap?    

A cafeteria plan that offers a health FSA must be formally amended to reflect the cap, and cafeteria plan amendments generally may be effective only prospectively.  The Notice provides welcome transition relief under which a cafeteria plan may be amended retroactively any time on or before December 31, 2014 to incorporate the cap, provided that the plan is operated in operational compliance with the cap after its 2013 plan year effective date.  

Are employer flex credit contributions subject to the $2,500 cap?  

In general, only employee salary reduction contributions are subject to the health FSA cap and employer “flex credit” contributions do not count against it.  The Notice, however, provides that if an employer provides flex credits that employees may elect to receive as cash or as a taxable benefit, those flex credits will be treated as salary reduction contributions subject to the cap.   

Is it possible that the health FSA “use-it-or-lose-it” rule could be modified in light of the new cap?  

Under the proposed cafeteria plan regulations, the so-called use-it-or-lose-it” rule generally prohibits contributions or benefits from being carried over to a subsequent plan year.  Significantly, the Notice states that the IRS and Treasury Department are considering whether to modify the use-it-or-lose-it rule for health FSAs in light of the new $2,500 cap.  The Notice states that the FSA cap “limits the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time.”  It requests comments as to whether the use-it-or-lose-it rule in the proposed regulations “should be modified to provide additional flexibility” as a result of the cap and, if so, how any such additional flexibility “might be formulated and constrained.”   Comments are due by August 17, 2012.

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions    

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html     

Contributors:  

Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.  

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. 

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