Recap of New Health Flexible Spending Account Rules

Starting in 2013, health FSAs cap at $2,500.

A health flexible spending arrangement (“FSA”) allows employees to pay for certain health care expenses on a tax-preferred basis. It is a benefit an employer may offer as part of a cafeteria plan, and it is usually funded through an employee’s salary reduction contributions. These contributions reduce the amount of wages subject to income and employment taxes. Employees can use the FSA funds to pay for certain health care expenses as they are incurred.

The Affordable Care Act (the healthcare reform legislation enacted by Congress in 2010) capped employee salary reduction contributions to health FSAs to $2,500 per year for plan years beginning after 2012. The $2,500 limit will be indexed for inflation for plan years beginning after 2013. As before, an employer may establish its own plan limitation, but an employer’s plan limit may not exceed the statutory limit.

The new limit does not affect the limitation on dependent care FSAs, health savings accounts, Archer Medical Savings Accounts, or an employee’s contribution for his or her share of health coverage premiums.

The limit on employee salary reduction contributions to a health FSA applies on an employee-by-employee basis. Therefore, $2,500 is the maximum that an employee may contribute, regardless of the number of individuals, such as spouse or dependents, whose medical expenses may be reimbursed under the plan. If two people are married, and each has the opportunity to participate in a health FSA, whether through the same employer or through different employers, each may contribute up to $2,500.

In the case of a plan providing a grace period,unused salary reduction contributions to the health FSA that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Employers may amend their plans to reflect the $2,500 limit at any time through the end of calendar year 2014, providedthe health FSA does not exceed the limit in operations for plan years beginning after December 31, 2012. If an employer’s plan already has a limit in place before the plan year beginning in 2013 that does not exceed $2,500, the employer will not (generally) need to amend the plan to reflect the new $2,500 limit.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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