One of the benefits of working for your current employer may be that they sponsor a cafeteria plan. Benefits provided under a cafeteria plan may be funded through employer contributions, employee salary deductions, or a combination of both. Cafeteria plans are aptly named because they often allow employees to choose from a “menu” of benefit options. Among these options are health care spending accounts.
A very common health care spending account is a “health care flexible spending arrangement,” commonly referred to as a health FSA. These health FSAs have become increasingly popular because they allow an employee to reduce his or her taxable income by paying for common medical expenses with before-tax dollars. Under the current law, there is no limit on the amount an employee can elect to contribute to a health FSA through salary reductions, unless the plan itself imposes dollar restrictions. However, it is a use-or-lose account, meaning whatever you elect to contribute to your account must be used prior to the end of the year (or within 2½ months of the following year if the plan allows a grace period) or the “left-over” contributions are forfeited.
With the passage of the Health Care Act, the new health FSA limits under Internal Revenue Service code section 125(i) will cap the annual salary reduction contributions at $2,500 per employee beginning January 1, 2013. The $2,500 limit on salary reduction contributions to a health FSA applies on an employee-by-employee basis. Thus, $2,500 is the maximum salary reduction contribution each employee may make for a plan year regardless of the number of other individuals (spouse or dependents) whose medical expenses are reimbursable under the employee’s health FSA. Consistent with this rule, if each of two spouses is eligible to elect salary reduction contributions to an FSA, each spouse may elect to make salary reduction contributions for the full $2,500, even if both participate in the same health FSA sponsored by the same employer.
Also, if either your spouse or you are employed by two or more employers that are not members of the same controlled group, you may elect up to $2,500 under each employer’s health FSA. However, if you are employed by two or more employers that are considered a single employer, then your aggregate elections may not be more than the $2,500 limit. If you are unsure and you have multiple employers, we can help you determine your maximum elections under all plans.
Furthermore, although Internal Revenue Code states that all participants in a cafeteria plan must be employees, there are exceptions for persons who own more than 2% of the shares of an S corporation or who are partners in a partnership. If you fall into those categories, please call our office for guidance.
Although this limit means that the maximum amount you will be able to contribute pre-tax to your flexible spending account for medical expenses is $2,500, statistics show this amount is still higher than what most employees contribute. According to Mercer’s National Survey of Employer-Sponsored Health Plans, the average employee contribution in 2009 was $1,424. The health FSA account will still remain a use-it-or-lose-it account. That is, any unused balance for one year will not be permitted to fund your health care spending in any future year. So you will want to be cautious, as always, in determining how much you will want to contribute since this election must be made prior to the start of the year.
Your employer’s plan may still provide for a grace period of up to 2½ months after the close of the year in which you can use any remaining balance in your account. If your plan provides for this grace period, unused salary reduction contributions to a health FSA for plan year beginning in 2012 or later that are carried over into the grace period for that plan year will NOT count against the new $2,500 limit for the subsequent year.
As an example, let’s assume at 12/31/12 that your health FSA balance is $500. You incur medical expenses of $500 during February of 2013 and use up your remaining balance from 2012 because it is within the first 2½ months of the year and your employer’s plan provides a grace period. You are still entitled to contribute the full $2,500 for the 2013 calendar year. If you also use the full $2,500 by the end of 2013, you would have been reimbursed for $3,000 worth of qualified medical expenses during the year. Keep in mind, however, that you must make your current year election prior to the start of the year regardless of whether you plan to use a remaining balance during the grace period.
This $2,500 limit is expected to be indexed for inflation for plan years beginning after 2013. It is also important to understand that the statutory $2,500 limit under IRS code section 125(i) applies only to salary reduction contributions under a health FSA. It does NOT apply to certain employer non-elective contributions (i.e. flex credits), to any type of contributions or amounts available for reimbursement under any other type of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums. This means that your salary reduced pre-tax share of your employer’s health plan is not included in the $2,500 limit nor is any type of flexible spending arrangement for dependent care assistance or adoption care assistance. The flexible spending arrangement for dependent care assistance remains at $5,000 per family.
If you are an employer, you must amend your current cafeteria plan to reflect this new annual limit. Plan amendments can be made at any time through the end of 2014 as long as the plan operates in accordance with the limitation after 2012 and the amendments are effective for plan years beginning after 2012. A cafeteria plan that fails to comply with the new code section 125(i) regulations for plan years beginning on January 1, 2013 will not be considered a section 125 cafeteria plan and the value of the taxable benefits that an employee could have elected to receive under the plan during the plan year will be includable in the employee’s gross income. It is extremely important if you offer these benefits to your employees that you remain in compliance with the new regulations. Our affiliated CPA firm, Rollins & Associates, PC, can assist you in amending or establishing your employer-sponsored cafeteria plan. Rollins & Associates can have a customized plan prepared for your company for $1,000 or less.
The foregoing is based on the regulations as imposed by the Health Care Act and IRS code section 125(i). This information was taken from the Internal Revenue Service Bulletin, Notice 2012-40.
If you have any questions, please feel free to contact us at 404.892.7967 or mail@rollinsfinancial.com and we will be happy to provide a complimentary assessment of your specific situation.
Best regards,
Rollins Financial, Inc.
A very common health care spending account is a “health care flexible spending arrangement,” commonly referred to as a health FSA. These health FSAs have become increasingly popular because they allow an employee to reduce his or her taxable income by paying for common medical expenses with before-tax dollars. Under the current law, there is no limit on the amount an employee can elect to contribute to a health FSA through salary reductions, unless the plan itself imposes dollar restrictions. However, it is a use-or-lose account, meaning whatever you elect to contribute to your account must be used prior to the end of the year (or within 2½ months of the following year if the plan allows a grace period) or the “left-over” contributions are forfeited.
With the passage of the Health Care Act, the new health FSA limits under Internal Revenue Service code section 125(i) will cap the annual salary reduction contributions at $2,500 per employee beginning January 1, 2013. The $2,500 limit on salary reduction contributions to a health FSA applies on an employee-by-employee basis. Thus, $2,500 is the maximum salary reduction contribution each employee may make for a plan year regardless of the number of other individuals (spouse or dependents) whose medical expenses are reimbursable under the employee’s health FSA. Consistent with this rule, if each of two spouses is eligible to elect salary reduction contributions to an FSA, each spouse may elect to make salary reduction contributions for the full $2,500, even if both participate in the same health FSA sponsored by the same employer.
Also, if either your spouse or you are employed by two or more employers that are not members of the same controlled group, you may elect up to $2,500 under each employer’s health FSA. However, if you are employed by two or more employers that are considered a single employer, then your aggregate elections may not be more than the $2,500 limit. If you are unsure and you have multiple employers, we can help you determine your maximum elections under all plans.
Furthermore, although Internal Revenue Code states that all participants in a cafeteria plan must be employees, there are exceptions for persons who own more than 2% of the shares of an S corporation or who are partners in a partnership. If you fall into those categories, please call our office for guidance.
Although this limit means that the maximum amount you will be able to contribute pre-tax to your flexible spending account for medical expenses is $2,500, statistics show this amount is still higher than what most employees contribute. According to Mercer’s National Survey of Employer-Sponsored Health Plans, the average employee contribution in 2009 was $1,424. The health FSA account will still remain a use-it-or-lose-it account. That is, any unused balance for one year will not be permitted to fund your health care spending in any future year. So you will want to be cautious, as always, in determining how much you will want to contribute since this election must be made prior to the start of the year.
Your employer’s plan may still provide for a grace period of up to 2½ months after the close of the year in which you can use any remaining balance in your account. If your plan provides for this grace period, unused salary reduction contributions to a health FSA for plan year beginning in 2012 or later that are carried over into the grace period for that plan year will NOT count against the new $2,500 limit for the subsequent year.
As an example, let’s assume at 12/31/12 that your health FSA balance is $500. You incur medical expenses of $500 during February of 2013 and use up your remaining balance from 2012 because it is within the first 2½ months of the year and your employer’s plan provides a grace period. You are still entitled to contribute the full $2,500 for the 2013 calendar year. If you also use the full $2,500 by the end of 2013, you would have been reimbursed for $3,000 worth of qualified medical expenses during the year. Keep in mind, however, that you must make your current year election prior to the start of the year regardless of whether you plan to use a remaining balance during the grace period.
This $2,500 limit is expected to be indexed for inflation for plan years beginning after 2013. It is also important to understand that the statutory $2,500 limit under IRS code section 125(i) applies only to salary reduction contributions under a health FSA. It does NOT apply to certain employer non-elective contributions (i.e. flex credits), to any type of contributions or amounts available for reimbursement under any other type of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums. This means that your salary reduced pre-tax share of your employer’s health plan is not included in the $2,500 limit nor is any type of flexible spending arrangement for dependent care assistance or adoption care assistance. The flexible spending arrangement for dependent care assistance remains at $5,000 per family.
If you are an employer, you must amend your current cafeteria plan to reflect this new annual limit. Plan amendments can be made at any time through the end of 2014 as long as the plan operates in accordance with the limitation after 2012 and the amendments are effective for plan years beginning after 2012. A cafeteria plan that fails to comply with the new code section 125(i) regulations for plan years beginning on January 1, 2013 will not be considered a section 125 cafeteria plan and the value of the taxable benefits that an employee could have elected to receive under the plan during the plan year will be includable in the employee’s gross income. It is extremely important if you offer these benefits to your employees that you remain in compliance with the new regulations. Our affiliated CPA firm, Rollins & Associates, PC, can assist you in amending or establishing your employer-sponsored cafeteria plan. Rollins & Associates can have a customized plan prepared for your company for $1,000 or less.
The foregoing is based on the regulations as imposed by the Health Care Act and IRS code section 125(i). This information was taken from the Internal Revenue Service Bulletin, Notice 2012-40.
If you have any questions, please feel free to contact us at 404.892.7967 or mail@rollinsfinancial.com and we will be happy to provide a complimentary assessment of your specific situation.
Best regards,
Rollins Financial, Inc.
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