After a lengthy wait, the IRS has issued additional guidance and clarification regarding the $2,500 plan maximum for health FSA’s effective for plan years after December 31, 2012.
Here is a summary of the guidance and what it means for Flexible Spending Account plans:
- The effective date has been clarified to apply to plan years beginning after December 31, 2012. If you have a plan that runs on an off-calendar cycle, you are not required to update the plan maximum if it is over $2,500 until the plan year that begins in 2013. If you would like to update your plan maximum with the plan year beginning in 2012, you can go ahead and update your plan design and documents.
- You must amend your plan documents to reflect the updated plan maximum. We recommend making the updates to your document before the start of your plan year however you have until December 31, 2014 to make these amendments. Contact your myCafeteriaPlan Account Representative for additional details regarding updating your plan documents.
- If your plan offers a grace period (additional time to incur expenses after the plan year has ended) any funds used during this time do not apply towards the $2,500 limit in the following plan year.
- If you are thinking about changing your plan year, remember it must be for a valid business reason and the sole purpose cannot be to avoid the $2,500 maximum. If you make a plan year change, the $2,500 limit would be prorated for the short plan year.
- If elections are mistakenly made that are over the $2,500 limit, the IRS has allowed for the additional funds to be included on the employee’s W-2 as taxable income for the year in which the plan ends.
- If an employee and their spouse are both enrolled in their employer’s health FSA, both may elect up to the $2,500 maximum.
In addition to the guidance issued, the Use-It-or-Lose-It Rule is being reviewed in light of the updated plan maximum. The IRS is accepting comments on the current rule. Instructions for submitting your comments may be found in the information contained in the link below.
If you would like to view the full notice the issued by the IRS it is also available by clicking on the following link:
You can count on BusinessPlans, Inc. – myCafeteriaPlan, to keep you updated as these rules and regulations are finalized.