The 2010 Health Care Act limits annual employee salary reduction contributions to cafeteria plan health flexible spending arrangements at $2,500 per employee, starting with 2013 “taxable years.”
Since the Act doesn’t define “taxable year,” new IRS guidance explains this term and other issues about the new limits. Here’s a brief summary:
- The term “taxable year” really means the cafeteria plan’s plan year.
- Although plans have to comply in operation starting with the plan year beginning in 2013, cafeteria plans (whether calendar or fiscal year plans) don’t have to be amended for the new $2,500 limit until December 31, 2014.
- The new $2,500 limit only applies to employee salary reductions under a cafeteria plan’s health flexible spending arrangement (FSA). It does not apply to any non-elective employer contributions or other benefits such as dependent care, health savings accounts, or the employee’s share of health coverage premiums (including the employee’s share under a self-insured health plan).
- The $2,500 limit is applied on an employee-by-employee basis, regardless of how many other individuals (spouse, dependents, adult children) have medical expenses that are reimbursable under a health FSA.
- If you employ two spouses, they each may elect to make salary reduction contributions up to the $2,500 limit.
- If your cafeteria plan provides for a grace period of up to 2½ months after the end of a plan year to use any unused salary reduction contributions to a health FSA, amounts that are carried over to the grace period will not count against the $2,500 limit for the next plan year.
- The IRS also explains how reasonable errors can be corrected without risk of plan disqualification in the event that the $2,500 limit is exceeded.
Contact Jim Derzon at 920-996-1435 or 800-236-2246 if you have any questions.
Jim Derzon, CPA, is an employee benefits specialist for our firm on technical matters pertaining to retirement plans and employee benefits. Jim works in these areas with our clients, large and small. He has extensive experience in both industry and public accounting.