It's not often that Flexible Spending Accounts (FSA) make the headlines, but last week the industry was buzzing over the IRS's clarification to the Patient Protection and Affordable Care Act (PPACA) legislation and two proposed FSA legislative changes.
Don't Rush to Change Your 2012 Health FSA Maximum to $2,500
As of January 2013, PPACA is requiring that employers limit the employee salary reduction on the Health FSA to $2,500 per year. The prior interpretation of the PPACA legislation was pushing employers, with non-calendar year FSA plans to modify their Health FSA maximum as of their 2012 renewal.
However, the IRS has now clarified the regulations stating that plan years beginning before January 1, 2013 are not subject to the $2,500 salary reduction limit on Health FSAs.
For example, if an FSA plan year renews on August 1, 2012 the employer is not required to comply with the $2,500 employee contribution limit until the August 1, 2013 FSA plan year.
The official IRS guidance can be found here.
Additional Clarification on the $2,500 Health FSA Limit
The following are few additional notable items of clarification with the $2,500 Health FSA limit.
An End to Use-It or Lose-It? (HR 1004)
- The $2,500 limit applies to each employee. If two spouses elect the Health FSA, each spouse has the option to elect the full $2,500. This applies to spouses who elect the Health FSA through the same or different employer plans. Note that this is contrary to the Dependent Care FSA which limits the employee election to $5,000 per family unit.
- The $2,500 limit applies only to the employee salary reductions made to their Health FSA. Contributions or reimbursements from other tax-favored accounts such as HSA, HRA, Dependent Care FSA or POP plans are not factored into the Health FSA limit.
- For FSA plans with a grace period, unused funds in the Health FSA plan in the 2012 plan year will not count against the $2,500 limit in the 2013 plan year
- The $2,500 limit will be indexed annually by the IRS beginning in December 31, 2013 based on the cost of living in $50 increments
Six House representatives introduced a bill to the House Way and Means Committee in an effort to increase participation in Flexible Spending Accounts. This bill would amend the current FSA regulations by appealing the current Use-It or Lose-It provision. Employees would be eligible to receive a cash distribution for all or a portion of their un-used FSA balance after the end of the FSA plan year. This distribution would be subject to taxes based on the year the cash distribution is issued.
On May 31, 2012, the bill was sent from the House Ways and Means Committee to the House for consideration.
Bring Back the Eligibility of Over-the-Counter Drugs (HR 5842)
Three House Representatives introduced a bill to the House Ways and Means Committee to repeal the PPACA provision that disqualified over-the-counter drugs without a prescription from FSA and HSA plans. As of January 1, 2011, over-the-counter drugs without a prescription were no longer eligible under a FSA or HSA plan.
On May 31, 2012, the bill was sent from the House Ways and Means Committee and to the House for consideration.
As the results on these issues come in we will continue to keep you apprised of the breaking news.