The headline news in IRS Notice 2012-40 (May 30, 2012) is that the health FSA (HFSA) annual maximum of $2,500 does not apply to HFSA plan years that begin before 2013. This is a change to the health care reform law provision that, as enacted, would have imposed the new $2,500 annual maximum on employee pre-tax contributions made on or after January 1, 2013, regardless of when the plan year began. Under the new IRS Notice, for example, an HFSA plan that runs from July 1 – June 30 and that currently has an annual maximum of $5,000 can continue to have this $5,000 annual maximum through June 30, 2013.
Unfortunately for non-calendar year plans that began in February – June, and that have already been amended to reduce the annual maximum pre-tax contribution to $2,500 (to comply with how everyone thought the new $2,500 cap would apply), the IRS Notice does not provide guidance on how plans and participants can change their annual maximums mid-year.
Other main points in Notice 2012-40
- Plans may adopt the required amendments to reflect the $2,500 limit at any time before December 31, 2014, but the new $2,500 annual limit must apply as of the beginning of the 2013 plan year.
- If a plan provides a grace period after the end of the plan year (e.g., allowing participants to submit claims incurred during the plan year, for up to two months and 15 days after the end of the plan year), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.
- Relief is provided for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.
The Notice also reiterates that the statutory $2,500 limit under § 125(i) applies only to salary reduction contributions under a Health FSA. The $2,500 limit does not apply to:
- Employer non-elective contributions (sometimes called flex credits),
- Any types of contributions or amounts available for reimbursement under other types of FSAs, health savings accounts (HSAs), or health reimbursement arrangements (HRAs), or
- Employee pre-tax contributions to “premium only” plans, in which employees can pay their share of group health insurance premiums (or of the cost of coverage under a self-insured group plan) via salary reduction contributions.
Additionally, in Notice 2012-40 the IRS requests comments on whether to modify the current “use-it-or-lose-it” rule that requires forfeiture of HFSA amounts that are not used to reimburse participants for claims incurred in the current plan year.