Though not the norm, some Cafeteria Plans (Section 125 plans) are not calendar year plans but instead are fiscal year plans (e.g. February 1-January 31). Be careful if this applies to you because if your fiscal year plans include Health Care Spending Accounts (HCSA), then as the plan sponsor, you must institute the $2,500 pre-tax contribution account maximum beginning with the first day of the 2012 fiscal year.
The Patient Protection and Affordable Care Act (PPACA) Section 9005 provides the following: “ if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement, for any taxable year beginning after December 31, 2012”. The potential trap is that the taxable year referred to is not the plan year of the plan but rather, the employee’s income tax filing year, or calendar year. Therefore, if an employee were to elect an amount in pre-tax contributions in excess of $2,500 (e.g. $2,800), that would result in the benefit remaining available in 2013, the plan would be disqualified.
As a result of this situation, the entire Cafeteria Plan would lose its tax favored status for the 2012 plan year, under the PPACA provision. Penalties for underreporting wages, under withholding income tax, FICA, and FUTA plus interest and other accumulated penalties would result. In order to avoid this occurring, plan sponsors with fiscal year plans must limit pre-tax contributions to HCSAs to $2,500 in 2012. Another alternative is to end the fiscal year plan short on December 31, 2012. For those employers who plan to set a Health Care FSA limit above $2,500 and have a fiscal year plan, it is imperative that they ensure that their employees understand the implications of their elections should they exceed the $2,500 limit. Any contribution amount above the $2,500 is susceptible to taxation.
Important to note:
• The $2,500 maximum for pre-tax contributions will apply regardless of “grandfathered” status.
• The $2,500 maximum is per employee regardless of the number of eligible dependents covered under the plan.
• In the instance that an employee has participated in more than one HCSA, perhaps due to a change in employment, tax practitioners believe it is the aggregate amount to which the $2,500 maximum will apply.
• If a plan has a grace period in which employees may collect benefits on claims up to 2 ½ months beyond the end of the plan year, the grace period is still permitted since the collection of the pre-tax contributions occurred during the plan year.
• The $2,500 limit only applies to the employee pre-tax contribution amount. If the employer offers a contribution, annual reimbursement amounts may exceed the $2,500 limit but only by the amount of the employer contribution.
• The limit is per participant, not per household. A husband and wife may each contribute $2,500 to their FSA plans resulting in a combined $5,000 pre-tax contribution but neither may exceed the $2,500 per person maximum.
Be prepared by implementing a strategy that will ensure that the collection of pre-tax contributions will not exceed $2,500 in 2013. Make sure to amend the Cafeteria Plan accordingly and to have safeguards in place for the plan administrator. Especially important is to notify all eligible participants in the 2012 fiscal year plan that there is a $2,500 pre-tax contribution limit for 2013 so that they can plan for any elective procedures (e.g. braces) in 2012. As 2013 approaches, employers that offer FSAs can help employees make informed decisions on what degree to participate in the Flexible Spending Plan while being mindful of the tax implications of the new $2,500 cap.
