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Distributed September 19, 2012

Health FSA Limits

Earlier this year, the IRS released Notice 2012-40, which provided guidance on the effective date of the statutory limit for health flexible spending account (FSA) salary reductions, in accordance with Section 9005 of the Patient Protection and Affordable Care Act of 2010 (PPACA). The $2,500 limit on health FSA salary reduction contributions applies on a plan year basis for FSA plans that begin on or after January 1, 2013. For further details, review our Compliance Flash published on June 7, 2012.

Action Required

Section 9005 amends Internal Revenue Code Section 125, and employers offering health FSA plans must take action and adopt the required cafeteria plan amendments to reflect the $2,500 limit. Typically, cafeteria plan amendments can be made only on a prospective basis; however, the new plan amendment deadline is December 31, 2014, and this amendment may be retroactive only if the FSA plan adopts and operates in accordance with the statutory requirements for plan years beginning after December 31, 2012.

Sample Plan Amendment

For your convenience, a sample FSA plan amendment package is linked. This package includes a Summary of Material Modifications (SMM) that is solely for illustrative purposes and may not apply to your particular factual situation. The amendment should not be used "as is," so be sure to consult with your legal advisor when modifying your current cafeteria plan.

Please note: If you have a short plan year, the $2,500 maximum must be pro-rated based on the number of months in the short plan year. We expect that any pro-rated maximum would be reflected in your enrollment materials and this expectation is reflected in the enclosed amendment. In addition, if you already have a maximum that is less than $2,500, a plan amendment is still necessary to ensure that those who cease to be eligible and become eligible again during the same plan year are not permitted to make salary reductions in excess of $2,500.

Educating Health FSA Participants

During your open enrollment period, please inform your employees of the new maximum limit for health FSA salary reductions. We have created a sample participant communication to assist with this endeavor.

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