New $2,500 Health FSA Limit Guidance

By Alistair M. Nevius, J.D.

From the IRS

In Notice 2012-40 the IRS provided guidance on implementation by employers of the $2,500 annual limit on employee salary reduction contributions to health flexible spending arrangements (health FSAs). The notice also requests comments on possible changes to the current “use-or-lose” rules for health FSAs.



The $2,500 limit, enacted by the Patient Protection and Affordable Care Act of 2010, P.L. 111-148, and amended by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, is effective with cafeteria plan years beginning after Dec. 31, 2012, and is indexed for inflation in subsequent years. Under previous law, the health FSA statutory provisions contained no contribution limit, although proposed regulations issued in 2007 would have required employers to set a maximum. Under Sec. 125(i), as added by the health care legislation, references to “taxable year” or years are to be interpreted as plan year or years, the IRS clarified.

Other clarifications in the notice include:

  • The limit is per employee. If a husband and wife both work for the same employer, each may make contributions of $2,500 per year.
  • The limit applies to all employers that are treated as a single employer under Sec. 414 as a controlled group or affiliated service group.
  • If a plan provides for a “grace period” of up to two months and 15 days in which salary contributions otherwise subject to health FSAs’ “use-or-lose” rules may be used by the employee, the carryover does not count against the subsequent plan year’s limitation.
  • If, by a reasonable mistake, an employer (that is not under audit for a cafeteria plan issue) or agent allows an employee to elect a salary reduction exceeding the maximum, and the excess is paid to the employee and reported as wages, the cafeteria plan will not cease to be a valid plan for that plan year.

Regarding the use-or-lose rules, the IRS requests comments particularly on any additional flexibility besides the grace period that could be provided and how such modifications would interact with the annual contribution limit. Comments must be submitted by Aug. 17, 2012, in a manner outlined and to the address contained in the notice.


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