How does the $2,500 FSA limit apply during a grace period?


Your manager asked you to look into some issues regarding the new $2,500 limit on salary-reduction contributions to health flexible spending arrangements (health FSAs) pursuant to the Patient Protection and Affordable Care Act (PPACA). Your plan currently has a grace period of two and a half months for participants’ unused contributions. Your manager wants to know how the $2,500 limit will affect unused contributions during the grace period in 2013. What should you tell her?


In the case of a plan providing a grace period, which may be up to two months and 15 days, 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, according to IRS Notice 2012-40.

The IRS guidance also provides that:

  • the $2,500 limit does not apply for plan years that begin before 2013;
  • the term "taxable year" in Internal Revenue Code 125(j) refers to the plan year of the cafeteria plan, as this is the period for which salary-reduction elections are made;
  • plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014; and
  • relief is provided for certain salary-reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Source: IRS Notice 2012-40, June 25, 2012.

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