Congress Puts Lid On Health Flexible Spending Arrangements

As part of the Patient Protection and Affordable Care Act (new health care law), employee contributions to health flexible spending arrangements (health FSA) are now being limited to a maximum pre-tax contribution of $2,500.

Employers are able to establish what is referred to as cafeteria plans for their employees. These arrangements allow employees to allocate a portion of their otherwise taxable compensation to nontaxable benefits. Thus, the amounts paid by both the employer and employee to fund the cafeteria plan are excluded from the employee's gross income.

Cafeteria plans are used to pay a variety of employee expenses, including group-term life insurance on an employee's life (up to the excludable $50,000 amount), employer-provided accident and health plans, accidental death and dismemberment policies, dependent care assistance program, adoption assistance program, contributions to a 401(k) plan, health savings account (HSA) contributions, long- and short-term disability coverage and health flexible spending arrangements (FSAs).

Health FSAs are benefit plans established by employers to reimburse employees for health care expenses, such as deductibles and co-payments. They are usually funded by employees through salary reduction agreements (and termed “pre-tax contributions”), although employers may contribute as well. Qualifying contributions to and withdrawals from FSAs are tax-exempt.

Prior to 2013, an employer could establish its own FSA plan's contribution limits. That continued to be true until the beginning of 2013, when Congress, as a way to partially pay for provisions in the new health care law, put a cap of $2,500 on FSA contributions. The $2,500 cap is inflation adjusted for future years.

This new $2,500 FSA limitation does not impact dependent care FSAs, health savings accounts, Archer medical savings accounts, or employee contributions toward health insurance premiums.

The limitation is on an employee-by-employee basis. That is, $2,500 is the maximum amount that an employee may contribute in 2013, regardless of the number of individuals (e.g., spouse or dependents) whose medical expenses may be reimbursed under the plan. However, if two people are married, and each has the opportunity to participate in a health FSA, whether through the same employer or through different employers, each may contribute up to $2,500.

The new health care law has many complicated elements. If you have questions regarding FSAs or other tax provisions in this law, please give this office a call.

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