New Health FSA Employee Contribution Cap Fast Approaching

By Kristi R. Gauthier / Sep 17, 2012

Under the Patient Protection and Affordable Care Act ("PPACA"), employee contributions to health flexible spending account (health "FSA") plans are limited to $2,500 starting with the first plan year beginning on or after January 1, 2013.  Given this fast approaching deadline, it is imperative that employers and plan sponsors review their health FSA plans to determine if the current maximum employee contribution level will be in compliance with PPACA beginning in 2013.  If a plan currently allows a higher employee contribution level, employers or plan sponsors will need to elect a new employee contribution cap of no more than $2,500.

The Internal Revenue Service has issued guidance clarifying the following facts with respect to the new health FSA contribution maximum:

  • The $2,500 limit is effective for plan years beginning on or after January 1, 2013.  Employers and plan sponsors with a plan year other than a calendar year may keep higher employee contribution limits in effect through the end of their 2012-2013 plan year.
  • While compliance begins with the first plan year beginning on or after January 1, 2013, employers and plan sponsors have until December 31, 2014 to adopt a retroactive amendment to their health FSA plan document.
  • The $2,500 limit applies only to employee contributions under a health FSA and not to employer nonelective contributions (sometimes called flex credits).  Furthermore, this $2,500 limit only applies to health FSAs and not to dependent care FSAs, health savings accounts (HSAs), health reimbursement arrangements (HRAs), nor to salary reduction contributions to cafeteria plans that are used to pay an employee's share of health coverage premiums (or the corresponding employee contribution share under a self-insured, employer-sponsored health plan).
  • In the case of a health FSA plan that provides a reimbursement 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.
  • Relief is provided for certain employee contributions exceeding the $2,500 limit that result from a reasonable mistake and not willful neglect and that are corrected by the employer or plan sponsor.

Employers and plan sponsors of a health FSA plan need to review current health FSA plan terms to determine whether the existing maximum employee contribution level needs to be amended and make the necessary changes to be in compliance with the fast approaching 2013 deadline.

If you have any questions, please contact Ed Hammond at (248) 988-1821 or ehammond@clarkhill.com ; Kristi Gauthier at (248) 988-5854, or kgauthier@clarkhill.com ; or Stephanie Hicks at (248) 988-5893 or shicks@clarkhill.com .