The U.S. Department of the Treasury issued Notice 2012-40 on May 30, 2012. The Notice provides additional guidance on the $2,500 limit imposed on salary reduction contributions to health flexible spending arrangements (health FSAs) effective Jan. 1, 2013. Additionally, the Treasury also requested comments on possible modifications to the “use-it-or-lose-it” rule for health FSAs.
The Notice 2012-40 specifically addresses questions regarding implementation of the contribution limit, particularly with respect to cafeteria plans with a non-calendar plan year. The guidance provides that:
- The $2,500 limit does not apply for plan years that begin before 2013. For example, a cafeteria plan with a July 1 plan year does not have to apply the limit until the plan year beginning on July 1, 2013;
- The term “taxable year” refers to the plan year of the cafeteria plan;
- Plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014;
- If a plan has adopted a grace period of up to two-and-a-half months, unused salary reduction contributions to the health FSA that are carried over into the grace period will not count against the $2,500 limit for the subsequent plan year;
- If a plan is timely amended to reflect the new $2,500 limit, relief is available for certain excess salary reduction contributions that result from a reasonable mistake and not willful neglect and that are corrected by the employer; and
- The contribution limit applies only to employee salary reduction contributions to health FSAs.
The limit does not apply to:
- Non-elective employer contributions;
- Employee salary reduction or other contributions to other types of FSAs;
- Health savings accounts;
- Health reimbursement arrangements; and
- Payment of an employee’s share of his or her health care coverage premiums.
Employers should be made aware that:
- Non-calendar year renewals do not need to initiate the change to the contribution limit prior to Jan. 1, 2013
- Non-elective employer contributions do not apply to the $2,500 limit
- Plan amendments do not have to be updated until the end of 2014