The IRS has relaxed PPACA’s $2500 HCFSA cap for non-calendar year HCFSAs

The IRS has relaxed PPACA’s $2500 HCFSA cap for non-calendar year HCFSAs

Yesterday the IRS provided some relief for non 1/1 HCFSA plans.   Under current law there is no dollar-limit-cap on HCFSAs.  However, since HCFSAs contain a “uniform coverage provision”, meaning that the entire annual election is made available on the first day of the plan year, employers self-regulate their HCFSAs caps.  Employers that are worried about turnover might cap their plan at $500, while employers with long-tenured employees feel comfortable with permitting a $5,000 annual limit.

But health care reform brought changes to that analysis.  The Affordable Care Act imposed a $2500 annual cap for tax year 2013.  Most prudent employers and plan sponsors of non 1/1 HCFSA plans began to impose that cap now, for fear that the IRS would force them to impose it on a participant-by-participant basis if their 2013 elections would take them over $2500 during 2013 (contributions in excess of $2500 during the 1/1/2013 to 12/31/2013 would have had to be reduced).

Lobbying Efforts Worked

The American Benefits Council was a great advocate for employers and plan sponsors in this regard.  In their April 24, 2012 letter to the IRS, they cited this example:

“For example, consider a health FSA with a fiscal year beginning July 1, 2012. Employees must make salary deferral elections for such fiscal year no later than July 1, 2012, and such elections will remain effective through June 30, 2013 (i.e., after the effective date of the limitation). The employee elects to defer $3,600 for the plan year beginning July 1, 2012. This translates to a salary reduction of $300 per month from July 1, 2012 through June 30, 2013. If the employee then elects to contribute $2,500 for the fiscal year commencing July 1, 2013 (i.e., the maximum contribution permitted for taxable years beginning after December 31, 2012), then he will run afoul of the $2,500 annual limitation in 2013 if the limitation is construed as becoming effective for the January 1, 2013 calendar year, since he will have deferred $300 for the first six months of 2013 and $208.33 for the last six months of 2013, for a total of $3,050 – a violation of the $2,500 limit for 2013.”

$2500 HCFSA limit will not apply for plan years that begin before 2013

In Notice 2012-40, the IRS eliminated this problem. Specifically, the IRS said the $2,500 limit will not apply for plan years that begin before 2013.  Also, groups that used/employed the permissible 2.5 month HCFSA “grace period” (under the IRS’ 2005 rule) have also been addressed.  [Note:  They are many others reasons why grace-period-HCFSAs are a bad idea (such as HSA problems), but, it is nice to see the IRS clear that issue up too].

Big News – IRS Requests Comments on “possible use-or-lose rule” changes for HCFSAs

In a stunning development, the IRS finishes off their 11-page notice by requesting comments on possible modifications to the “use-it or lose-it” rules.  The IRS cautions that they “like” the use-it or lose-it rationale as a restriction against deferring compensation.  But, they are open to suggestions, timing and possible limitations that could/may provide additional flexibility.  Comments are due by August 17, 2012 (see details below for commenting).  [Note:  This is purely a comment only section and cannot be used/seen as guidance; you may not rely upon this to relax your plan’s use-it or lose-it features].

Please contact your Account Manager or Account Executive if you would like to discuss any of these issues further.


IRS Comments are due by 08/17/2012

Comments should include a reference to Notice 2012-40. Send submissions to CC:PA:LPD:PR (Notice 2012-40), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be sent electronically, via the following e-mail address: Please include “Notice 2012-40” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.