Health FSA election limit $2500

[bcspace]

I keep hearing that that this does not take effect until 2013. However, the PPACA wording seems to say it takes effect for plan years beginning after Dec 31, 2010 and that adjustments for cost of living begin after Dec 31 2013:

SEC. 9005. LIMITATION ON HEALTH FLEXIBLE SPENDING ARRANGEMENTS

UNDER CAFETERIA PLANS.

(a) IN GENERAL.—Section 125 of the Internal Revenue Code of

1986 is amended—

(1) by redesignating subsections (i) and (j) as subsections

(j) and (k), respectively, and

(2) by inserting after subsection (h) the following new subsection:

‘‘(i) LIMITATION ON HEALTH FLEXIBLE SPENDING ARRANGEMENTS.—

øReplaced by section 10902(a)¿

‘‘(1) IN GENERAL.—For purposes of this section, if a benefit

is provided under a cafeteria plan through employer contributions

to a health flexible spending arrangement, such benefit

shall not be treated as a qualified benefit unless the cafeteria

plan provides that an employee may not elect for any taxable

year to have salary reduction contributions in excess of $2,500

made to such arrangement.

‘‘(2) ADJUSTMENT FOR INFLATION.—øAs revised by section

1403(b) of HCERA¿ In the case of any taxable year beginning

after December 31, 2013, the dollar amount in paragraph (1)

shall be increased by an amount equal to—

‘‘(A) such amount, multiplied by

‘‘(B) the cost-of-living adjustment determined under

section 1(f)(3) for the calendar year in which such taxable

year begins by substituting ‘calendar year 2012’ for ‘calendar

year 1992’ in subparagraph (B) thereof.

If any increase determined under this paragraph is not a multiple

of $50, such increase shall be rounded to the next lowest

multiple of $50.’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2010.

Which or what is the correct interpretation?

[Chaz]

Section 1403 of HCERA changed the effective date of the limit to 1/1/13:

SEC. 1403. DELAY OF LIMITATION ON HEALTH FLEXIBLE SPENDING ARRANGEMENTS UNDER CAFETERIA PLANS.

(a) IN GENERAL.—Section 10902(b) of the Patient Protection and Affordable Care Act is amended by striking ‘‘December 31, 2010’’ and inserting ‘‘December 31,

15 2012’’.

[Guest ConnieLawson]

Doesn't this just pertain to Employer contribution FSA plans?

[LRDG]

Sec. 125 salary reduction election amounts are considered ER contributions, one of the principles of Sec. 125.

Your comment does bring up an interesting point for plan with ER Flex credits and what effect ER credits would have on the HFSA $2500 limit effective 1/1/13. I assume the total ER and EE contributions may not be more than the $2500, but the regs as written are not clear. I'm also curious about plans with non-elective ER credits.

[Guest cbclark]

We are having a bit of an issue. A flex plan with health FSA option had a short plan year and implemented a new plan year effective 3/1. Now the new plan year in 2012 will cross into 2013. Is the $2,500 cap effective in the 3/1/2012 plan year? Or does it kick in in the 3/1/2013 plan year? Thanks.

[oriecat]

My understanding is that the $2500 cap is calendar year for everyone. Plan year is irrelevant.

[Guest Sieve]

Oreocat is correct - calendar year. So, if the cafe plan has a 10/1/2012-9/30/2013 plan year, and the participant selects a $300/month deferrals into the flex plan, then he/she will meet the $2,500 2013 calendar year limit in September, 2013, and could only defer $100 in September, 2013, and nothing for the rest of 2013.

Also, the $2,500 limit applies by statute to the employee's deferrals (IRS Section 125(i)(1)). Employer flex credits are not covered by the limit.

[Guest cbclark]

Thanks to the both of you for your replies. I had come to the same conclusion but wanted some collegial backup to explain to the powers that be that it might be better to limit the off years to $2,500 now rather than letting the participants get whacked in 2013.

[oriecat]

I agree, with an off calendar year plan, it will be a lot easier to just limit it early than to have to deal with the issues that will come up otherwise.

[Guest adowse]

My understanding is that the $2500 cap is calendar year for everyone. Plan year is irrelevant.

I have also heard that the $2500 cap is calendar year. However, in its explanation of the $2,500 health FSA limit, the 2011 Bluebook prepared by the Joint Committee on Taxation (JCS-2-11, March 1, 2011) states that the $2,500 limit is a plan year limit. Specifically, Section XI.E of the 2011 Bluebook states:

"Under

 in order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement . . . under the Health FSA [u]for a plan year [/u] [or other 12-month coverage period) must not exceed $2,500. . . . Thus, when an employee is given the option under a cafeteria plan maintained by an employer to reduce his or her current cash compensation and instead have the amount of the salary reduction be made available for use in reimbursing the employee for his or her medical expenses under a Health FSA, the amount of the reduction in cash copmensation pursuant to a salary reduction election must be limited to $2,500 [u]for a plan year[/u].

. . .

In the event of a [u]plan year [/u]or coverage period that is less than 12 months, it is intended that the limit be required to be prorated." (emphasis added)

Is there any guidance regarding the $2,500 limit under Code Section 125(i) that is more recent than the 2011 Bluebook? If not, it seems that a plan could argue that the $2,500 limit is applied on a plan year basis. Any thoughts?

[Guest cbclark]

My understanding is that the $2500 cap is calendar year for everyone. Plan year is irrelevant.

I have also heard that the $2500 cap is calendar year. However, in its explanation of the $2,500 health FSA limit, the 2011 Bluebook prepared by the Joint Committee on Taxation (JCS-2-11, March 1, 2011) states that the $2,500 limit is a plan year limit. Specifically, Section XI.E of the 2011 Bluebook states:

"Under

 in order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement . . . under the Health FSA [u]for a plan year [/u] [or other 12-month coverage period) must not exceed $2,500. . . . Thus, when an employee is given the option under a cafeteria plan maintained by an employer to reduce his or her current cash compensation and instead have the amount of the salary reduction be made available for use in reimbursing the employee for his or her medical expenses under a Health FSA, the amount of the reduction in cash copmensation pursuant to a salary reduction election must be limited to $2,500 [u]for a plan year[/u].. . . In the event of a [u]plan year [/u]or coverage period that is less than 12 months, it is intended that the limit be required to be prorated." (emphasis added)Is there any guidance regarding the $2,500 limit under Code Section 125(i) that is more recent than the 2011 Bluebook?  If not, it seems that a plan could argue that the $2,500 limit is applied on a plan year basis.  Any thoughts?

The interplay between plan year and taxable year could drive a person bats. My take is that the limit has to reference the plan year, otherwise it would make no sense insofar as we are talking about "plans," but I have no idea how that squares with the reference in the Act to taxable year, which is (generally in this context) the individual's taxable year, which is calendar. Of course we have limited the amount available in the off-calendar year plans that start in 2012 and end in 2013 to be cautious; this now throws a huge monkey wrench in. Ideas anyone?

[Guest Sieve]

Except that IRC Section 125 uses "plan year" when it means plan year (e.g., Section 125(b)(1)). So, "taxable year" ought to mean something other than plan year.

[oriecat]

The IRC also uses taxable year:

26 USC 125 (i) Limitation on health flexible spending arrangements

For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.

[Guest cbclark]

The IRS just released Notice 2012-40 that says the $2,500 cap does not apply to plan years beginning before 2013. That is nice.

Here is the issue: plan year began 3/1/2012. Employer limited the health FSA pre-tax contribution to the cap. It did not want to limit it, but thought the cap applied to crossover years. Given that the IRS now says the cap does not apply to 2012/13 crossover years, can the employer permit the already participating employees to change their election to go back to the higher limit the employer previously had? THANKS!

[Chaz]

The bigger news in this notice is that the IRS in contemplating getting rid of the whole "use it or lose it" requirement.