While the fate of the Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act) remains somewhat uncertain, pending the outcome and scopeof the decision of the U.S. Supreme Court expected later this month, the Federal agencies chargedwith providing health care reform regulations continue to churn out guidance. Last week, the U.S.Department of Treasury released Notice 2012-40, in which it provides guidance on the $2,500annual limit that will apply to health flexible spending accounts beginning in 2013.
The $2,500 annual limit was added to the Internal Revenue Code rules governing cafeteria (or “125”) plans as part of the 2010 health care reform legislation. Pursuant to the amended Internal Revenue Code provision, a health flexible spending account may not permit an employee to make elective salary reduction contributions to the account in excess of $2,500 per year. (The $2,500 annual limit will be indexed for inflation beginning in 2014.) In Notice 2012-40, the Department of Treasury provides the following guidance to sponsors of plans that include health flexible spending accounts:
• the $2,500 annual limit applies for plan years that begin after 2012 (thus, for example, plans that operate on a July 1 to June 30 plan year do not have to comply with the limit before July 1, 2013);
• plans can impose a limit that is lower than $2,500;
• the limit applies only to employee salary reduction contributions under a health flexible spending account, and does not apply to employer non-elective contributions (sometimes called flex credits), to employee salary reduction contributions that are used to pay an employee’s share of the cost of health plan coverage (sometimes called premium conversion), or to any types of contributions or amounts available for reimbursement under other types of flexible spending accounts, health savings accounts or health reimbursement arrangements;
• the limit applies on a per employee basis, regardless of the employee’s marital, family or dependent status;
• the limit for an employee who is employed by more than one entity in the same controlled group of employers is an aggregate of $2,500, even if the employee is eligible to participate in more than one controlled group plan;
• the limit for an employee who is employed by two or more unrelated employers is $2,500 per employer plan;
• in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health flexible spending account for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year; and
• affected plans must be amended to include the annual limit, but the required amendment may be adopted as late as December 31, 2014 (prior to the adoption of an appropriate amendment, an affected plan must be operated in compliance with the limit).
Although there is a chance that all of the 2010 health care reform legislation will be declared unconstitutional by the U.S. Supreme Court, and that the $2,500 limit will not become effective at all, most scholars and other commentators believe that only the individual mandate portion of the health care reform legislation is vulnerable. There is a good chance that the remaining portions of the legislation, including the $2,500 annual limit on an employee’s salary reduction contributions to a health flexible spending account, will survive.
Therefore, employers that maintain health flexible spending accounts should begin to plan for the new limit, taking into account the guidance provided in Notice 2012-40. For example, open enrollment materials that will be distributed to employees prior to the beginning of the 2013 plan year (e.g., salary reduction election forms and certain summaries of benefits and coverage) should include appropriate descriptions of the new limit. Also, while formal plan amendments need not be made until 2014, changes in plan administration may need to be made to implement the limit by the applicable (2013) effective date.