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IRS Releases Guidance Concerning the 2013 FSA Contribution Limit


The IRS has released Notice 2012-40 which provides guidance on the effective date of the $2,500 contribution limit to health flexible spending arrangements (FSAs) under IRS Code Section 125(i) and on the deadline for amending plans to comply with the limit. The notice also provides relief for contributions that mistakenly exceed the $2,500 limit provided they are corrected in a timely manner.

Specifically, Notice 2012-40 states:

the $2,500 limit does not apply to plan years that begin before 2013;

in the case of a short plan year, the $2,500 limit must be prorated based on the number of months in the short plan year;

the term “taxable year” in Section 125(i) refers to the plan year of the cafeteria plan;

the $2,500 limit is applied on an employee by employee basis and is applied separately for each unrelated employer that an individual may be working for during the year;

plans may adopt the required amendments for each unrelated employer that an individual may be working for during the year;

plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of the calendar year 2014;

in the case of a plan with a grace period, unused salary reduction contributions to the FSA for plan years beginning in 2012 or later that are carried into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year; and

relief is provided for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

The IRS is also calling for comments related to the use of the use-it-or-lose-it rule. All of this is great news for administrators of FSAs. We will keep you apprised of any further information as it becomes available.

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