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Flex credits and the $2500 cap - Notice 2012-40


jsb
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Maybe an old issue but I couldn't find an answer to my specific query. I'm back in the benefits world after a 5 year hiatus and am still shaking out the cobwebs and catching up on changes to the law. There's been a few... Could really use your collective assistance in straightening out some things as I plow through becoming acquainted with my employer's benefit plans.

Employer maintains a125 Cafeteria Plan which contains the following provisions:

"3.3 Benefit Component Elections -- Each Participant shall elect among Benefit Components and shal designate the amount of Salary reduction and/or Employer Credits (or portion of the total) to be applied during the Plan Year for each of the Benefit Componenets, and the amounts so disignated shall be credited to the appropriate Benefit Component subaccount."

"3.4 Cash Benefits -- A Participant may elect to receive in taxable cash compensation any amount contributed by the employer as Employer Credits."

Internal Revenue Notice 2012-40 contains the following:

"As noted, the $2,500 limit applies only to salary reduction contributions and not to employer non-elective contributions, sometimes called flex credits. Generally, an employer may make flex credits available to an employee who is eligible to participate in the cafeteria plan, to be used (at the employee’s election) only for one or more qualified benefits. For further information on flex credits, see Prop. Treas. Reg. § 1.125-5(b). For example, if an employer contributes a $500 flex credit to each employee’s health FSA for the 2013 plan year, each employee may still elect to make salary reduction contributions of $2,500 (as indexed for inflation) to a health FSA for that plan year. However, if an employer provides flex credits that employees may elect to receive as cash or as a taxable benefit, those flex credits are treated as salary reduction contributions for purposes of § 125(i)." (emphasis added)

Not all employees get Employer Credits (depends on your union and date of hire). Employer's credits vary in amount (based on union negotiations), but can be up to $1,200 per month which easily exceeds the $2,500 annual limit.

My question - should the employer's flex credits be treated as salary reduction contributions, thus violating Section125 limits?

Your expert guidance and opinions (whether humble or not) would be most welcome!

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