Health FSA Maximum Limit on Salary Reductions

As a result of the Affordable Care Act (ACA), health flexible spending account (FSA) salary reductions are limited to $2,500 effective for taxable years beginning on or after January 1, 2013 (the maximum limit may be indexed for inflation each year). The IRS states that a taxable year refers to the plan year of the cafeteria plan, so the elected health FSA salary reductions apply for plan years that begin on or after January 1, 2013.

Please note: If desired, employers may establish a maximum limit on health FSA salary reductions below the statutory amount established by the IRS.

Compliance with Health FSA Annual Limits

Health FSA plans cannot allow participants to contribute more than the statutory annual maximum limit, and after December 31, 2012, a plan that fails to comply with the health FSA statutory limit will not be considered a Section 125 cafeteria plan. If applicable, the value of the taxable benefits that the employee could have elected under the plan during the plan year must be included in the employee's gross income.

Typically, cafeteria plan amendments can only be made on a prospective basis. However, this plan amendment deadline is December 31, 2014, and the amendment may be retroactive only if the FSA plan adopted and operated in accordance with the statutory requirements for plan years beginning after December 31, 2012.

For certain salary reduction contributions that exceed the annual limit, relief is available if due to a reasonable mistake and not intentional neglect. If applicable, the employer (or the employer's agent) must address and correct the mistake.

Exceptions to the Maximum Annual Limit on Salary Reductions

The statutory annual limit does not apply to certain non-elective employer contributions (sometimes referred to as "flex credits") made to an employee’s health FSA. It also does not apply to contributions made to other types of FSAs (i.e., dependent care FSA), health savings accounts (HSAs), or health reimbursement arrangements (HRAs). Employer salary reduction contributions to cafeteria plans that are used to pay for an employee's share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan) are also not affected.

In addition, if each spouse is eligible to make contributions to a health FSA, each spouse may elect to contribute up to the maximum limit to his or her health FSA. This applies even if both spouses participate in the same health FSA sponsored by the same employer.

Communicating Changes to Your Employees

Participants should be reminded to review their FSA spending and determine a health FSA election amount that will allow them to maximize their tax benefits without exceeding the annual limit for the 2014 plan year. You may use the following message to communicate the health FSA annual limit to your employees. Please insert your health FSA plan’s maximum limit for the 2014 plan year as well as contact information, and if applicable, the grace period end date.

While you may make minor changes to reflect your policies and procedures, please do not make material changes to this information. We strongly encourage you to include this message in your open enrollment materials or post it to your intranet or other employee portal. If you need further guidance, please contact your CONEXIS representative.

Sample Language

As part of the changes introduced by health care reform acts, health flexible spending accounts (FSAs) will continue to have a maximum limit for employee contributions. For the 2014 plan year, the maximum amount you may elect is $2,500. This amount may change each plan year due to inflation.

Keep in mind that the IRS allows each spouse to each elect up to the maximum annual limit for his or her health FSA. This applies even if you and your spouse both work for our organization.

Add paragraph below if your organization makes FSA contributions.)

Also, the 2014 FSA maximum limit only applies to employee contributions. The funds that we contribute to your health FSA are allowed as long as you cannot cash them out. Plus, funds contributed by our organization do not count against the maximum limit.

With open enrollment just around the corner, it’s a great time to review your spending and carefully consider your health FSA election amount. Decide if you want to elect the maximum amount, or you may also want to reduce your election if you are not using the funds you contributed last year. Knowing how to elect properly to reflect your lifestyle and health care needs will help you make the most of your FSA.

Visit the CONEXIS website for online calculators to help you figure out how much to put into your FSA. On the site, you can also find a complete list of eligible FSA expenses.

(Add paragraph below if your plan includes a grace period.)

Please note: If you still have money in your health FSA at the end of the 2013 plan year, you may carry those leftover funds into the two-month and 15-day grace period for that plan year. To keep from forfeiting money, the funds carried over must be used by Month xx, 20xx. The 2013 funds will not count against the annual limit for the 2014 plan year.

If you have any questions about 2014 elections or our FSA plan in general, please contact [enter contact information here].

Thank you,