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Additional $2,500 Health FSA Cap Guidance

The IRS recently issued Notice 2012-40 to clarify how the upcoming cap on employee salary deferrals to a health FSA will work. The guidance is very welcome, and provides positive news for non-calendar year health FSA plans. The key provisions included the following:

  1. The cap only applies to Health FSA plans that begin on or after January 1, 2013. This cleared up uncertainty regarding non-calendar year plans beginning in 2012; the cap will not apply to such plans until the following plan year start date. For example, a health FSA plan that runs from July 1, 2012 to June 30, 2013 will be exempt from the cap until July 1, 2013. Note however that a plan sponsor cannot adopt a non-calendar year plan year solely in order to postpone the new cap. There must be a legitimate business reason for making such a change.
  2. For plans that have adopted the optional 2-½ month grace period, amounts carried over during the grace period do not count toward the cap.
  3. Relief is provided for certain salary reduction contributions that exceed the cap that are due to a reasonable mistake and not willful misconduct and are corrected by the employer.
  4. Employers have until the end of 2014 to amend their plan documents (if not done already) to incorporate the cap (the cap, however, will apply beginning in 2013 regardless).
  5. If both spouses have an FSA available, each can fund his/her health FSA to the full amount of the cap. In addition, if an individual is employed by two separate employers who are not members of the same controlled group or affiliated service group (as defined by the IRS ), he or she may establish and fund an FSA at each employer up to the amount of the cap. The timing and details of this guidance are helpful and positive for non-calendar year health FSA plans. Prior to this guidance, there were still a number of outstanding questions regarding to the treatment of non-calendar year plans. The guidance avoids potential complicating situations that might have arisen for employees in those plans.

And (Maybe) Even Better News

The IRS also stated in this guidance that it is considering changing the “use it or lose it” rule to provide relief to employees and to lower or eliminate the risk of loss. The IRS has invited comments on this issue (including a specific invitation from the Department of Treasury to our President and CEO, Gary Kushner for his counsel). The comment period runs through August 17, 2012. This is potentially the most exciting news to hit the FSA arena in years, but the specific form of the relief could significantly influence the extent to which employers would adopt any modification and employees would understand its value.

Kushner & Company has advocated for the modification or elimination of both the “use it or lose it” rule as well as the “employer risk-shift” rule for over 28 years. We will continue our in-depth advocacy and coverage as this discussion continues in Washington.

- Ben Cohen, Practice Leader - Health and Welfare Benefits Kushner & Company

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