For plan years beginning on or after Jan. 1, 2013, the Patient Protection and Affordable Care Act imposes a $2,500 limit on annual salary reduction contributions to health Flexible Spending Accounts (FSAs) offered under cafeteria plans. This is a reduction from the current limit of $5,000.
To be in compliance with this requirement, if a plan’s current maximum election amount exceeds the $2,500 limit, the plan document must be amended by the start of the plan year to state the new election amount. If the limit is not included in the plan document, it will cause the FSA to fail to qualify as a permissible cafeteria plan, potentially resulting in the cafeteria plan's loss of its qualified status and taxation of all benefits.
The $2,500 amount is indexed for cost-of-living adjustments for plan years beginning after Dec. 31, 2013. The health care reform law's provisions regarding grandfathered plans do not apply to this requirement, so all health FSAs offered under cafeteria plans must comply with this new maximum amount.
The $2,500 limit applies to Health FSA salary reduction contributions. Non-elective employer contributions to an FSA (e.g., matching or seed contributions) generally do not count toward the limit. However, if employees are allowed to elect to receive the employer contributions in cash or as a taxable benefit, then the contributions will be treated as salary reductions and will count toward the limit if contributed to the FSA.
To help ABC members amend their plans, ABC MeritChoice Insurance has provided a sample of the information required in establishing an amendment for your plan documents. It is available in PDF format
For more information on FSAs, visit the IRS website
or the IRS notice
on this topic.