Benefits Alert 2012-03
Trish Neely, CFCI
The Agency just issued Notice 2012-40 to help answer some of the outstanding questions related to the cap. We have carefully reviewed the guidance; our interpretation follows in Q/A format.
Q1. Is there any new guidance on the effective date?
A. The Agency has opined that the reference to “taxable year” refers to the “plan year” of the cafeteria plan. Therefore the effective date of the $2,500 cap applies on a plan year basis and is effective for plan years beginning after 12/31/2012.
Q2. How will this apply to any MFSA cost of living adjustments (COLAs)?
A. The $2500 limit will be indexed for plan years beginning after 12/31/2013.
Q3. Does the Medical FSA (MFSA) cap apply to both the employee and employer contributions?
A. The cap applies only to an employee’s salary reduction contributions; it does not apply to the employer contribution.
Q4. Is the $2500 maximum a family maximum?
A. No, the $2500 limit on salary reduction contributions applies on an employee-by-employee basis. Thus, if each spouse is eligible to elect salary reduction contributions through a MFSA, each spouse may elect to do so.
Q5. What about the same individual who works multiple jobs?
A. An employee employed by two or more employers (that are not members of the same controlled employer group) may elect up to $2,500 under each employer’s MFSA.
Q6. If I also have a Dependent Care FSA, a Health Reimbursement Arrangement, or a Health Savings Account, how do I calculate my cap?
A. The $2,500 cap only applies to the MFSA. It does not limit the amount contributed to any other plan, nor does participation in any other plan limit the amount contributed to the MFSA.
Q7. My plan has a grace period. If I use my remaining 2012 account contribution of $300 to reimburse expenses incurred on February 15, 2013 does this mean that I can’t put the full $2,500 into my 2013 account? Do I have to reduce it by $300?
A. No, unused salary reduction contributions from 2012 that are carried over and used in 2013 do not count against the $2,500 limit in 2013.
Q8. Are there any remedies if an error is made and an employee is permitted to over-contribute and be reimbursed too much?
A. When an error occurs that is a reasonable mistake (and not willful neglect) by the employer or its agent, the error may be corrected by reporting as wages the amount of the over-contribution in the year in which the correction is made. (A similar methodology is used to correct outstanding debit card transactions.)
Important note: the relief cited in this Q&A pair is for errors that are uncovered by the employer or its agent, and corrected timely; it is not available if uncovered as part of an employer’s federal tax return examination.
Q9. We are in the process of having our plan documents amended before the end of 2012 so we are ready with our new plan year beginning 1/1/2013. If our board meeting to adopt the new plan does not occur until January 10, 2013, will our plan be out of compliance?
A. An amendment to conform the plan to the $2,500 maximum may be made up until 12/31/2014 and may apply retroactively to 1/1/2013. The important thing is to operate the plan in full compliance. (This is unusual as generally any changes to a plan document may only be made prospectively.)
Q10. Is there any momentum to revisit “use it or lose it?”
A. Given that the $2,500 cap limits the potential for using a medical FSA to defer compensation, Treasury and the IRS are considering whether the rule should be modified.
Comments will be accepted through 8/17/12 to the following address. Make sure you include “Notice 2012-40” in the subject line. Notice.email@example.com
If you have any questions about this Alert please contact firstname.lastname@example.org.