Thursday, May 31, 2012

IRS announces transition relief for non-calendar year FSA plans

Late yesterday, the IRS issued Notice 2012-40, which provides transition relief to non-calendar-year FSA plans by establishing that the requirement does not apply for plan years that begin before 2013 and that the term "taxable year" in the law refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made.

This is a change from the initial guidance and will provide the options for plans renewing 6/1/2012 through 12/31/2012 to keep a higher maximum if they wish to do so.  Some FSA administrators may also allow groups that renewed previously in 2012 to increase their maximum above $2,500 and allow employees to change their elections.

Plans will have until the end of 2014 to amends their SPDs to reflect the new maximum.  For plans that have a grace period for their health FSA, any unused amounts that carry over into the grace period do not count against the cap.  The cap only applies to employee salary reduction contributions, and does not apply to employer contributions.  Additionally, the cap is a per-employee cap (rather than a family cap) and each spouse may contribute up to the max whether through the same or different employers.

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