Under the Affordable Care Act, (aka ObamaCare) starting January 1, 2013, there will be a new $2,500 annual salary-deferral limit for healthcare FSAs. In light of the new $2,500 cap on healthcare Flexible Spending Accounts taxpayers should be asking: “do we need the use-it-or-lose-it rule?” It might mean hundreds of dollars extra in your pocket each year.
Whether you currently have an Flexible Spending Account (FSA) in place or are considering one, Daszkal Bolton would like you to be aware that the Internal Revenue Service recently issued a Notice on the new $2,500 Limit on Health Care FSAs. The Notice states that the $2,500 limit on contributions to health flexible spending accounts is applicable for plan years beginning on or after January 1, 2013. This means that non-calendar year plans do not need to institute a mid-year limit to comply with applicable law. In addition, the Notice states that the $2,500 limit does not apply to heath savings accounts or health reimbursement accounts or “flex-credits” granted by an employer. In addition, for cafeteria plans under Section 125 of the Code with grace periods which allow use of contributions for up to two and one-half months after the end of the plan year, the $2,500 limit does not apply to any amounts contributed for the previous plan year and available during such grace period.
If an employee erroneously contributes more than $2,500 to his or her health flexible spending account for plan years beginning on or after January 1, 2013, the Notice provides for a correction method for employers to refund amounts over the limit to the employee and adjust the employee’s reportable wages for the applicable tax year. This correction method is available only if the employer has complied with the written plan requirements of Section 125 of the Code, the erroneous contribution was due to reasonable mistake and not willful neglect by the employer and the employer’s cafeteria plan is not under examination for the plan year in which the erroneous contributions occurred.
The Notice also provides that employers may amend the cafeteria plan anytime prior to December 31, 2014 to comply with the new FSA limit. Such amendment may express the limit as a maximum dollar amount or use another method to express the new $2,500 limit. The $2,500 limit will be subject to cost of living increases and this type of indexing should be considered when drafting any required amendments.
The limit applies on an employee-by-employee basis rather than per household, so spouses may each contribute up to $2500 to separate FSAs. In other words, contribution limits could be up to $5000 per household for families where each spouse contributes separately. The limit does not apply to dependent care or adoption assistance FSAs.
Over 30 million employees contribute pre-tax salary into these FSAs to cover out-of-pocket healthcare expenses like co-pays, deductibles, and dentist visits. But millions don’t take advantage of these plans because of the “use-it-or-lose it” rule: Dollars left in the account at the end of the plan year are forfeited. Many employees make unnecessary expenditures at the end of the year to run down their balance, and those who forfeit money because they miscalculated projected expenses are justifiably angry.
The Department of Treasury in is soliciting comments on whether to modify the use-it-or-lose-it rule. Anyone can send in comments via email to [email protected] (subject line: IRS Notice 2012-40) through August 17, 2012. We urge you to do so today!
Daszkal Bolton strives to keep our clients up to date on legislative developments affecting both their personal and business tax planning, compliance, and general accounting requirements. If you need more clarification on this or any other tax-related issue please contact Sandy Smith, CPA, Tax Services Principal in our Fort Lauderdale Office. He can be reached at 561-367-1040, or [email protected].