IRS Issues Guidance on $2,500 Health Flexible Spending Account Limit

By Darcy Norville
The IRS recently issued helpful guidance in Notice 2012-40 on the $2,500 annual limitation on salary reduction contributions to health flexible spending accounts ("FSAs"), effective beginning in 2013. The Notice clarifies the following:

  • Measurement period and effective date: The $2,500 limit is computed with respect to the cafeteria plan year. The $2,500 limit applies to plan years that begin after December 31, 2012. The limit will be indexed for inflation after 2013.
  • Deadline for adopting cafeteria plan amendments: An amendment to a cafeteria plan to adopt the $2,500 limit may be made effective retroactively, so long as the amendment is adopted no later than December 31, 2014 and the cafeteria plan operates in accordance with the $2,500 limit beginning after December 31, 2012. This is welcome relief from the general rule that cafeteria plans may not be amended retroactively.
  • Limit applies on an employee-by-employee basis: The $2,500 limit applies on an employee-by-employee basis, regardless of whether the health FSA also covers a spouse or dependents.
  • Contributions to which $2,500 limit applies: The $2,500 limit applies only to employee salary reduction contributions to a health FSA. It does not apply to employer contributions, sometimes called flex credits, which may be used only for qualified benefits under the cafeteria plan. However, if an employer provides flex credits that employees may elect to receive as cash, those flex credits are treated as salary reduction contributions and count toward the $2,500 limit.
  • Effect of grace period on $2,500 limit: If a cafeteria plan provides for a grace period (which may be up to two months and 15 days) for a plan year, unused salary reduction contributions to the health FSA 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.
  • Correction of mistakes: If salary reduction contributions in excess of the $2,500 limit are made to a health FSA as a result of a reasonable mistake of the employer (or the employer's agent) and not due to willful neglect, the cafeteria plan will not lose its qualified status if the excess salary reduction contribution is paid to the employee and reported as wages for income tax withholding and employment tax purposes on the employee's Form W-2 Wage and Tax Statement (or Form W-2c, Corrected Wage and Tax Statement) for the employee's taxable year in which, or with which, ends the cafeteria plan year in which the correction was made.

This client update is intended to provide general information to our clients and should not be construed as legal advice. If you have questions regarding this client update, please contact your principal attorney at Tonkon Torp LLP, or Darcy Norville at 503.802.2036 or

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