Changes Affecting Healthcare Flexible Spending Accounts Begin January 1, 2013

December 5, 2012

By: Adam Dauksas

Beginning January 1, 2013, a new pre-tax, salary-deferral limit for healthcare flexible spending accounts (“FSAs”) will take effect.  As part of the federal Patient Protection and Affordable Care Act (commonly referred to as “ObamaCare”), FSAs will soon have annual limits of $2,500 per year, with that figure then rising each year thereafter based on the rate of inflation.

This is an important change in the law because, up until now, there has not been an official cap on how much employees could contribute to FSAs; IRS rules merely dictated that employers had to come up with their own maximum contribution amounts. Typically, employers have set this figure somewhere between $2,000 - $5,000.

This new $2,500 limit, however, applies to the plan year, not the calendar year.  For instance, if your plan year is tied to the fiscal year and thus your next plan year does not begin until July 1, 2013, then that is when the $2,500 limit takes effect.  In addition, if your current plan provides for a grace period (which can be up to two months and fifteen days), unused salary FSA deferrals that are carried over into that grace period do not count against the $2,500 limit applicable to your next plan year.

Yet despite this new limit, FSAs – for now, at least – will still be subject to the IRS’ “use-or-lose” rule, meaning that any unused money left in the account at the end of the plan year is forfeited by the employee (Note: The “use-or-lose” rule may well be amended in the future.  On June 25, 2012, the IRS stated, in its Notice 2012-40, that “[g]iven the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief.”).

In light of these changes, you should review your plan documents as soon as possible for compliance with the new $2,500 limit.  If you need to amend your plan or have any other questions regarding FSAs, please do not hesitate to contact Scariano, Himes and Petrarca, Chtd.