Cafeteria plans' health flexible spending arrangements will have $2,500 limit
Sept. 7, 2012
The Internal Revenue Service has issued guidance on the implementation of the $2,500 limit on cafeteria plans' health flexible spending arrangements. Beginning with the first cafeteria plan year starting on or after Jan. 1, 2013, contributions to a health FSA are only excluded from taxable income if the cafeteria plan limits employee contributions to $2,500 per plan year, per employee.
Can you clarify how this affects employees with health FSAs?
The $2,500 limit is employee-specific in two general ways:
- Each employee's contributions to a health FSA are limited to $2,500. This means the amount does not increase based on the number of dependents, family members, or other beneficiaries that may be eligible to pay for medical expenses using this account.
- If each spouse has access to a health FSA through their respective employer, then each spouse may contribute up to $2,500 to their respective health FSA.
Additionally, the limit is employer specific. For example, if an individual has access to multiple cafeteria plans that offer salary reduction elections to a health FSA through different employers (and the employers are not part of the same controlled group), then the individual can contribute up to $2,500 to each health FSA.
What types of employer contributions count towards the $2,500 limit?
If the employee can choose to convert an employer's contributions into cash or treat them as a taxable benefit, then the employer contribution is treated as a salary reduction contribution. Therefore, this counts toward the $2,500 cap.
What does not count towards the limit?
Non-elective employer contributions to a health FSA (such as "flex credits") do not count toward the $2,500 cap.
Can an employer change cafeteria plan years without affecting the health FSA requirements?
Cafeteria plan years can only be changed for a valid business purpose. If the principal reason for changing a plan year is to delay applying the $2,500 limit, the change in plan year will be considered void. Then, the plan year will revert to what was in effect before the change.
Where can I find more information?
For more information, please go to the IRS Notice 2012-40 (PDF).
The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.