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The Wagner Law Group Description 

The Wagner Law Group, A Professional Corporation, is a nationally recognized ERISA & employee benefits, estate planning, employment, labor & human resources practice. 

 

Established in 1996, The Wagner Law Group has 19 attorneys engaged exclusively in employee benefits, estate planning and employment law. Five of our attorneys are AV rated by Martindale-Hubbell as having very high to preeminent legal abilities and ethical standards. The firm is among the largest ERISA boutiques in the country. Our practice is national in scope, with clients in more than 40 states and several foreign countries.

 

 

 

 

 

Contact Info

The Wagner Law Group

 

Massachusetts Office 

Tel: (617) 357-5200 

Fax: (617) 357-5250 

99 Summer Street 

13th Floor

Boston, MA 02110


Florida Office 

Tel: (561) 293-3590
Fax: (561) 293-3591
7121 Fairway Drive
Suite 203
Palm Beach Gardens, FL 33418

 

New York Office

Tel: (716) 650-5987

Fax: (716) 633-0301

333 International Drive

Suite B-4

Williamsville, NY 14221

 

San Francisco Office

Tel: (415) 625-0002

Fax: (415) 829-4385

315 Montgomery Street

Suite 902

San Francisco, CA 94104

 

www.wagnerlawgroup.com

 

June 7, 2012 

 State and Federal Law Alert

 

 

 

 

 

 

IRS Issues Guidance on Salary Reduction Contribution Limits for Health FSAs

 

 

 

The IRS has issued Notice 2012-40 to provide guidance on the $2,500 limit on salary reduction contributions to health flexible spending accounts ("health FSAs"). The Notice also sets the deadline for cafeteria plan amendments, and provides relief for certain excess contributions.

 

Effective Date

 

PPACA imposes a $2,500 limit on salary reduction contributions to health FSAs during a "taxable year." The Notice explains that: (i) the $2,500 limit applies to plan years beginning on or after January 1, 2013; and (ii) because employees make salary reduction contribution elections for health FSAs on a plan year basis, the term "taxable year" refers to the cafeteria plan's plan year and not the employee's tax year. Thus, plan administrators of non-calendar year plans will not face the additional task of tracking salary reductions for employees' tax years. 

  

Guidance on Limit

 

The Notice provides the following guidance about the $2,500 limit: 

  • Impact on "Other" Salary Reduction Contributions, HRAs and HSAs. The $2,500 limit only applies to salary reduction contributions made to health FSAs. The limit does not apply to salary reduction contributions used to pay health insurance premiums (e.g., through premium conversion plans) or to FSAs for dependent care assistance or adoption care. The limit also does not affect employee contributions to health savings accounts or amounts made available by an employer under a health reimbursement arrangement.
  • Grace Periods. If a health FSA has a grace period (which may be up to two months and 15 days), unused contributions that are carried over into the grace period will not count towards the $2,500 limit for the following plan year.
  • Employee-by-Employee Basis. The $2,500 limit applies on an employee-by-employee basis. Therefore, if only one spouse is employed, the limit remains at $2,500, regardless of how many dependents are covered by the health FSA. However, if both spouses are employed, each may elect to make up to $2,500 in salary reduction contributions, even if both participate in the same employer's health FSA.
  • Employees Employed by Two or More Employers. Employers that are part of the same controlled group are treated as a single employer for purposes of the $2,500 limit. Thus, salary reduction contributions made to health FSAs by an employee participating in multiple cafeteria plans maintained by members of the same controlled group must be limited to $2,500. However, an employee employed by two or more employers that are not members of the same controlled group may elect to contribute up to $2,500 under each employer's health FSA.
  • Inflation Increases. Indexing of the $2,500 limit applies to plan years beginning after December 31, 2013.

 Amendment Deadline

 

The Notice clarifies that cafeteria plans must adopt amendments to comply with the $2,500 limit by December 31, 2014. In general, cafeteria plan amendments may be effective only prospectively. However, the Notice explains that an amendment to conform to the $2,500 limit that is adopted by December 31, 2014, may be made retroactively effective, provided that the plan operates in accordance with the limit for plan years beginning after December 31, 2012.

 

Reasonable Mistake Relief

 

The Notice provides that if a cafeteria plan erroneously allows an employee to elect a salary reduction of more than $2,500 for a plan year, the cafeteria plan will be permitted to retain its tax qualified status so long as:

  • the plan is amended to comply with the $2,500 limit by December 31, 2014;
  • the terms of the plan are applied uniformly to all participants;
  • the error results from a reasonable mistake by the employer and is not due to willful neglect; and
  • the salary reduction contributions exceeding $2,500 are paid to the employee and treated as wages for income tax withholding and employment tax purposes for the tax year in which the correction is made. 

The reasonable mistake relief is not available for an employer if a federal tax return of the employer is under examination regarding its failure to comply with the $2,500 limit.

 

Request for Comments

 

The Notice concludes by requesting comments on whether to modify the use-it-or-lose-it rule that is currently contained in the proposed regulations with respect to health FSAs. Comments must be submitted to the IRS by August 17, 2012.

 

 

 

 

This Newsletter is protected by copyright. Material appearing herein may be reproduced with appropriate credit.

  

Pursuant to Internal Revenue Service Circular 230, we hereby inform you that any advice set forth herein with respect to US federal tax issues is not intended or written by The Wagner Law Group to be used and cannot be used, by you or any taxpayer, for the purpose of avoiding penalties that may be imposed on you or any other person under the Internal Revenue Code.

 

This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.