FSA Changes Coming in 2013

Beginning January 1, 2013, Health Care FSA contributions will be limited to $2,500 per calendar year per employee as a result of the new health care reform law. An important part of the law to take note of is that this change applies to the calendar year and not the plan year. This could cause a bit of a dilemma for plan years that do not coincide with calendar years. 

Consider a Health Care FSA plan year that runs from July 1 through June 30 and imposes a $5,000 maximum. How is that maximum affected by the $2,500 limit imposed in 2013? Thus far, the IRS has yet to address this issue or deliver a concrete course of action. Unless and until it does, we presume one of three possible options would comply with the intent of the new law. 

Option One: The most conservative option would be to simply impose the $2,500 limit before 2013. In the above example, for instance, the employer would simply reduce the $5,000 limit to $2,500 beginning July 1, 2012. 

Option Two: Another cautious option would be to declare a so-called "short plan year" for the balance of 2012 and start things fresh on January 1, 2013 with a plan year that follows the calendar year. In the above example, for instance, participants could elect up to $5,000 for the July 1- December 31 short plan year. Of course, this option may not be acceptable to plan sponsors who do not want to administer a plan year that follows the calendar year. 

Option Three: This option is somewhat more aggressive than the above two, but may be something some plan sponsors want to consider: Employees would "front-load" some of their salary reductions in 2012 for use during the 2013 part of the plan year.

So, again using the above example, the employer would maintain the health FSA's $5,000 limit on salary reduction contributions but still ensure that no more than $2,500 in salary reductions occur in 2013 (in the case of a $5,000 election, for instance, by simply requiring $3,750 in salary reductions in 2012 and then only $1,250 for the balance of the 2013 half of the plan year). 

The IRS has been largely silent on this issue so far, so the above options are only possible solutions. 

It is also best to keep in mind that with the upcoming changes to the FSA if you have been planning to use your FSA dollars for things like laser eye surgery or braces, it might be best to do so in 2012 before the FSA limit goes into effect.