The time has almost come! The $2,500 cap on flex spending accounts goes into effect Jan. 1. So IRS felt it was a good time to give you a little guidance on the new requirements.
The Service just issued Notice 2012-40 to clarify some of the more confusion-provoking aspects of the new rules.
Chances are not only your Finance staffers but your company’s other employees will have many of these questions the Taxman has answered with this new guidance.
5 must-have answers
Specifically, the guidance tackled these five burning questions about the looming deadline. Take a look to make sure you and your staffers understand what’s expected of your company:
- When does the new $2,500 contribution limit kick in? You still have seven months. IRS reassures that the $2,500 limit doesn’t apply for plan years that begin before 2013.
- What is considered the “taxable year”? This has gotten muddier in recent years as companies now allow employees to carry some FSA money over into the first quarter of the following year. But the term “taxable year” according to Section 125(i) refers to the plan year of the cafeteria plan, since that’s the period for which employee salary reduction elections are made.
- How long do we have to edit our plan to include the new requirements? You have some breathing room here – IRS says plans may commit the required amendments in writing to reflect the $2,500 limit at any time through the end of calendar year 2014. Of course your company still has to be following those requirements from Jan. 1, 2013.
- What happens if we offer the grace period into the following year? Many of your peers do this these days as a service to their employees. If you do offer grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year won’t count against the $2,500 limit for the subsequent plan year.
- What if we mess up? IRS will cut you a break, at least for a while. The new guidance spells out that the Service will provide relief for certain salary reduction contributions exceeding the new $2,500 limit if they’re made because of a reasonable mistake, rather than willful neglect — as long as you correct it.
To read the complete notice, click.