By Mary Ellen Schill
October 10, 2012
It might not have seemed significant back in 2010 when Health Care Reform was enacted, but upcoming open enrollment for flexible benefit plans will have something new in 2013. Starting with the 2013 plan year, changes to the Internal Revenue Code mean that medical flexible spending accounts must limit employee contributions to $2,500 per plan year. Prior to Health Care Reform, there was no limit on the amount that an employee could contribute to a medical flexible spending account (“FSA”), other than the limit the employer put in the plan document. That will change for flexible benefit plan years beginning on or after January 1, 2013.
Wondering how it all works? We’re here to help you with answers to some important questions.
Q. To what does this new limit apply?
A. Any employer-sponsored flexible spending account that reimburses medical expenses must include the new $2,500 limit. Dependent care assistance spending accounts are not subject to this limit.
Q. Do all employers have to comply?
A. Yes, all employers that allow employees to contribute to a medical reimbursement account on a pre-tax basis must limit contributions to no more than $2,500 per plan year. This includes for-profit businesses of all sizes, tax-exempt organizations, and federal, state, and local governments.
Q. Do employer medical FSA
contributions count towards this limit?
A. Employer medical FSA contributions made to an employee s FSA do not count towards the $2,500 limit, unless those employer contributions can be taken in cash or in the form of a taxable benefit. For example, employer-provided flex credits that could be taken in cash but are instead contributed to the employee’s medical FSA at the employee’s election would count toward the limit.
Q. What happens if there is a short (less than 12-month) plan year?
A. The $2,500 limit is pro-rated if the plan year for the flexible benefit plan is less than 12 months.
Q. What if my employees pay their health plan premiums on a pre-tax basis through my flexible benefit plan. Do those premium payments count towards the limit?
A. No, premium payments through a flexible benefit plan do not count towards the $2,500 limit on an employee’s medical FSA contributions.
Q. Will the $2,500 limit ever be increased?
A. The $2,500 limit will be adjusted for inflation starting with the 2014 plan year. As with other IRS limits that are adjusted for inflation, annual increases are not always a given.
Q. Does an employer’s plan have to allow contributions up to the IRS
A. No, employers may design a flexible benefit plan with a lower contribution limit if they so desire.
Q. Is this change automatic, or do I need to do something with my flexible benefit plan document?
A. Flexible benefit plans must comply in operation with this new limit beginning with the 2013 plan year. Plan documents must be updated no later than December 31, 2014 (regardless of the plan year for the plan).
Need assistance with implementing the new medical FSA limit? Please contact Mary Ellen Schill, the author of this article, or any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware for more information about the new IRS limit for medical FSAs or any other questions about Health Care Reform compliance.
This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.
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