The Internal Revenue Service (IRS) issued Notice 2012-40 clarifying the Health Care Reform law’s $2,500 limit for salary reduction contributions to Health Flexible Spending Accounts (Health FSAs). Although the $2,500 limit is not scheduled to take effect until January 1, 2013, many plan sponsors with non-calendar year cafeteria plans wondered whether and how the limit would be applied to plan years beginning in 2012. The notice clarifies that:

• the $2,500 limit applies only to salary reduction contributions, not to other employer contributions such as flex credits;
• the $2,500 limit does not apply to cafeteria plan years beginning before January 1, 2013 (but the IRS says a plan sponsor can’t change their plan year merely to delay the $2,500 limit);
• the $2,500 limit applies separately to each individual who is eligible to participate in a Health FSA; if each spouse is eligible to participate in a Health FSA through the same or different employers, each spouse can separately contribute $2,500;
• unused salary reduction contributions to a health FSA for a plan year beginning in 2012 or later that are carried over to the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year ;
• plan sponsors can amend cafeteria plans retroactively to reflect the $2,500 limit at any time through December 31, 2014, however, the plan cannot allow a participant to make salary reduction contributions for a plan year beginning January 1, 2013 and after in excess of the $2,500 limit; and,
• 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.

American Fidelity Assurance Company does not provide tax or legal advice.