The salary contribution limit is applied differently to new hires and short plan years.
Question: How does the $2,600 health FSA salary reduction contribution limit apply to mid-year new hires? What about to a short plan year?
Compliance Team Response:
New Hires: Unlimited Health FSA Elections Among Multiple Employers
Employees can contribute up to $2,600 to the health FSA with as many unrelated employers as they are employed by. So employees with two unrelated employers in the same year may contribute the max to both employer’s plans—even though the annual total may exceed $2,600.
This is because the health FSA $2,600 salary reduction contribution limit is merely a plan year maximum. It’s not an individual maximum. Employees can therefore make full $2,600 elections to multiple health FSA plans in the same year.
(Note that this is different from the dependent care FSA, which imposes an individual calendar year maximum. The dependent care FSA rules limit total calendar year contributions to $5,000 (or $2,500 if married filing separately) over all employers combined.)
Short Plan Years: Prorated Limit
The Section 125 rules permit a short health FSA plan year for a valid business purpose, such as the transition period when moving to a new plan year.
Where there’s a short plan year when switching to a new health FSA plan year, the plan must prorate the $2,600 health FSA salary reduction contribution limit for the short plan year.
For example, take a health FSA moving from a 7/1 plan year to a 1/1 plan year. The short health FSA plan year running 7/1 – 12/31 could not permit employees to contribute more than $1,300 in that short plan year (6/12 or 1/2 of $2,600). The prorated limit applies to all elections made in that short plan year—even mid-year new hires who never had a previous health FSA election.
(Note that the prorated salary reduction contribution limit for a short plan year does not affect the $500 carryover for plans that offer it. Employees may carry over up to $500 into and out of a short plan year.)
Final Note: All of the above rules apply identically to both a general purpose or limited purpose health FSA.
Internal Revenue Code §125(i) [As Added by the ACA]:
(i) Limitation on health flexible spending arrangements.
(1) In general.
For purposes of this section, 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.
(2) Adjustment for inflation.
In the case of any taxable year beginning after December 31, 2013, the dollar amount in paragraph (1) shall be increased by an amount equal to—
(A) such amount, multiplied by
(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting “calendar year 2012” for “calendar year 1992” in subparagraph (B) thereof.
If any increase determined under this paragraph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.
IRS Notice 2012-40:
All employers that are treated as a single employer under § 414(b), (c), or (m), relating to controlled groups and affiliated service groups, are treated as a single employer for purposes of the $2,500 limit. If an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 (as indexed for inflation). Section 125(g)(4). However, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer’s health FSA.
If a cafeteria plan has a short plan year (that is, fewer than 12 months) that begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year.
Treas. Reg. §1.125-1(d)(3):
(3) Short plan year. A short plan year of less than twelve consecutive months is permitted for a valid business purpose.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).