IRS Provides Guidance for Employers Regarding New Limitation on Salary Reduction Contributions to Health Flexible Spending Accounts

By: Lisa M. Schonbeck, Esq.

The Internal Revenue Service (“IRS”) recently issued guidance regarding the new $2,500 limit on salary reduction contributions to health flexible spending accounts (“health FSAs”). The new limitation is mandated by Section 125(i) of the Patient Protection and Affordable Care Act (“PPACA”) and is set to become effective on January 1, 2013, for many employers that sponsor health FSAs.

When Will Employers Be Required to Implement the New Limitation?

If an employer’s health FSA plan begins and ends according to the calendar year, it is subject to the new limitation starting January 1, 2013. Accordingly, any FSA plans that begin after December 31, 2012 will need to apply the $2,500 limitation to salary reduction contributions made by employees to health FSAs. On the other hand, if an employer’s health FSA is a fiscal year plan, and thus began prior to December 31, 2012, the employer may maintain the higher limitations until the end of its plan period.

What Effect Does the Limitation Have on Employers?

Between now and December 31, 2014, employers will need to amend their FSA plans to reflect the $2,500 limitation. Additionally, employers will need to ensure that their health FSA plans actually comply with the limitation. If an employee’s salary reduction contributions exceed the $2,500 limitation, the FSA becomes a non-qualified benefit and the value contributed will be included in the employee’s gross income for tax purposes. It is important for employers to note that this limitation applies only to salary reduction contributions to health FSAs and does not limit employees’ contributions to other types of FSAs.

Leech Tishman’s Employment Practice Group will continue to provide updates on the effective date of this, and other mandates under the PPACA. Additionally, the Employment Practice Group is available to assist your organization in complying with any of these mandates, in written plans and in practice.

Lisa Schonbeck is an associate at Leech Tishman in the Employment and Litigation Practice Groups. Lisa can be reached at 412.261.1600 x 233 or lschonbeck@leechtishman.com. Please feel free to contact Lisa with any questions regarding the developments surrounding PPACA or any other employment law issue.

Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions.  We combine a deep understanding of our clients and their businesses with skilled legal counsel to find solutions.  We offer legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, insurance coverage & corporate risk mitigation, litigation, real estate, and taxation. For more information call 412.261.1600 or visit www.leechtishman.com.