Benefits Alert 2012-05

Several clients have requested amendments to their current Medical FSA plan documents and summaries for their corresponding SPDs. We recommend you delay until the first quarter of 2013.

Why do we recommend a delay?

First. We reported to you in BA 2012-03 that the Treasury Department and the IRS were considering whether the use-or-lose rule for health FSAs should be modified. They invited comments from tax payers and more than 1,000 letters were received by the 8/14/12 deadline. As we suspected, the majority were in favor of a rollover of unspent contributions and elimination of use-it-lose-it.

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.

The brouhaha over Dependent FSA maximums not keeping pace with the tax credit maximums ends on 12/31/2010. That’s the date that absent any further extension by Congress the EGTRRA increases to the tax credits will sunset. The caps will return once more to $2,400 and $4,800.

Up until 2001, the maximum amount that could be claimed at yearend as a dependent tax credit was $2,400 for one child or $4,800 for two or more. Under Dependent Care Flexible Spending Arrangements (DFSAs), often referred to as Dependent Care Assistance Programs (DCAPs), the maximum allowable contribution is $2,500 for one child or $5,000 for two or more. The Internal Revenue Code § 21 was amended in 2001 by EGTRRA, and the limits for the tax credit were increased to $3,000 and $6,000. Thus began the industry attempt which we supported wholeheartedly to raise the DFSA to keep pace. However, despite our champions’ efforts in Congress, no introduced bill ever made it out of committee. 

Why the concern; why the effort?