Limit on Health FSA ContributionPosted on: August 12, 2014Categories: HR & Compliance
The ACA imposes a $2,500 limit on salary reduction contributions to a health FSA offered under a cafeteria plan. This limit became effective for plan years beginning after Dec. 31, 2012. Thus, starting in 2013, a health FSAs must limit the annual amount of salary reduction contributions that each employee can make to $2,500 (or a lower limit selected by the employer).
On Oct. 31, 2013, the Internal Revenue Service (IRS) announced that the health FSA limit will remain unchanged at $2,500 for taxable years beginning in 2014. However, the $2,500 limit potentially will be indexed for cost-of-living adjustments for later years.
Also, in connection with the ACA’s limit on salary reduction contributions, the IRS released Notice 2013-71, which relaxes the “use-or-lose” rule for health FSAs. Under the relaxed rule, employers may allow participants to carry over up to $500 in unused fundsinto the next year. This modification applies only if the plan does not also incorporate the grace period rule. The carryover provision is available beginning with the health FSA’s 2013 plan year.