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Cafeteria plans which provide a health flexible spending arrangement (FSA) allow participants to make pre-tax salary contributions to an account in order to receive reimbursements to pay for medical expenses that are not reimbursed through insurance or another arrangement (e.g., co pays, deductibles, eyeglasses).  Prior to the Patient Protection and Affordable Care Act of 2010, sponsors of these plans could set an annual limit for contributions to health FSAs per plan terms.  Sponsors typically established such limits by taking into consideration the uniform coverage rule which requires that if a participant elected the maximum amount permitted and incurred a reimbursable claim early in the year, the claim would need to be paid even if the full salary reductions up to that limit had not yet been made.  Effective for cafeteria plan years beginning after 2012, the Affordable Care Act requires that health FSAs limit employee salary reduction contributions to $2500 per plan year (to be indexed for cost of living adjustments).  Cafeteria plans must be amended to reflect this new limit (or a lower limit) before December 31, 2014 but must operate in compliance with these changes in the law for plan years beginning after December 31, 2012.  The limit does not apply to certain employer flex credits, health savings accounts, health reimbursement arrangements or contributions used to pay the employee share of health premiums.

The IRS has issued Notice 2012-40 to provide guidance on issues related to these requirements.  For example, for plans that provide a grace period for use of contributions, 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 $2500 limit for the subsequent plan year. Also, the $2500 limit is the maximum contribution each employee can make under all of the cafeteria plans of a single employer (determined on a controlled group basis) for a plan year regardless of the number of their dependents (but two spouses who are eligible to contribute to a health FSA may do so, each subject to their own maximum limit even if both participate in the same health FSA sponsored by the same employer).  An employee employed by two or more employers that are not members of the same controlled group may elect up to $2500 (as indexed for inflation) under each employer’s health FSA.

In light of the $2500 limit, the Treasury Department and IRS have asked for comments whether the “use-or-lose” rule for health FSAs should be modified, which currently requires that unused amounts in a health FSA be forfeited at the end of a plan year (subject to any grace period terms). Comments are requested on whether there should be additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and how such flexibility could be formulated.  Comments must be submitted by August 17, 2012 to the IRS and can be submitted electronically to with the subject line “Notice 2012-40”.

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