Effective January 1, 2013, health flexible spending accounts (FSAs) must limit benefits to $2,500 per calendar year per enrolled employee. The limit appears to apply only to employee pre-tax contributions to health FSAs. Because the vast majority of health FSAs are funded at least in part by employee pre-tax contributions, the vast majority of health FSAs are affected by the benefit limit. Health FSA documents should be amended prior to 2013 to reflect this limitation, unless the limit is repealed by Congress later this year.
Making Up Missed Contributions (Or, “No Good Deed Goes Unpunished”)
It’s not uncommon for health FSAs to reflect an existing, employer-imposed limit of up to $5,000 (until 2013, there are no federally-imposed health FSA limits; any existing limit is set by the employer). Some employers might consider adding employer non-elective contributions to the health FSAs of employees who otherwise would have contributed more than $2,500 in pre-tax contributions (“non-elective” contributions are employer contributions that an employee cannot take as cash).
Employers thinking about adding their own non-elective contributions to an employee’s health FSA, however, should understand that employer contributions can pose unique challenges to health FSA administration. For example, if an employer makes significant annual contributions (generally, at least $500) to an employee’s account, the FSA becomes subject to other health reform requirements, to expanded COBRA obligations, and to HIPAA portability requirements.
Complexity for Non-Calendar Year Health FSAs
The impending $2,500 limit poses the thorniest administrative issues for health FSAs that operate on a non–calendar year fiscal year, because the $2,500 limit applies on a calendar year basis.
To illustrate the complexity, consider a health FSA operating on a July 1 – June 30 plan year. Let’s say for the 2012-13 fiscal year, an employee elects $4,000 in benefits, and by January 1, 2013, the employee has contributed $2,000 to the FSA for the fiscal year and has an available balance of $3,500 (he or she receives $500 in claim payments for the first half of the fiscal year).
Chances are the employee will receive $3,500 (or close to it) in reimbursements between January 1 and June 30, 2013. Is this a problem, even though the employee will only contribute $2,000 to his or her FSA during that same period? Does the health FSA remain “qualified” if it limits the employee’s FSA election for 2013-14 to $1,000, so the employee will only contribute $500 for the last half of 2013 (bringing to $2,500 the amount he or she actually contributes for all of 2013)?
We hope this does not create a problem. Employers with non-calendar year health FSAs will have significant administrative challenges if the IRS will require employers to track and limit calendar year benefit payments under their health FSAs, as opposed to calendar year pre-tax employee contributions. If the IRS adopts the former view, this problem will exist even where the FSA limits employees to a $2,500 election for the July 1 – June 30 fiscal year, because the employee might receive, say, $2,500 in benefit payments during the last half of one fiscal year, and up to $2,500 in the first half of the next fiscal year, and thus receive more than $2,500 in benefits during the same calendar year.
As yet there is no formal guidance on this point. For many years, however, dependent care FSAs have operated with a calendar year dollar limit on benefits. Although the Tax Code requires the employer to report the value of dependent care benefits received by an employee, the IRS has allowed the employer to simply report the amount the employee contributed for the calendar year. We suspect the IRS will allow employes to apply the $2,500 health FSA limit the same way, that is, by looking to the amount the employee contributed for a calendar year, irrespective of benefit payments actually received during the calendar year.
Amend Early?
In that case, an employer with a non-calendar year health FSA might want to amend the program to impose the $2,500 limit beginning with the 2012-13 fiscal year…that is, to get a jump on the requirement. This way, when open enrollment rolls around for the 2013-14 fiscal year, the employer won’t have to fret about tracking employees’ contributions for the 2013 portion of the 2012-13 year.
— Edward Fensholt, JD
Upcoming Lockton Webcast: Lockton is hosting a webcast on February 23, 2012, at 2 p.m. Central time to update you on all the goings on related to health reform, including an in-depth look at recent guidance regarding W-2 reporting of health plan values.