FSAs Require Careful Compliance Care

A flexible spending account (FSA) can serve as a solid employee benefit that can help workers pay for out-of-pocket costs with pretax dollars, but employers must keep a close eye on new rules from the Patient Protection and Affordable Care Act (PPACA) that impact the accounts, experts say.

Starting Jan 1, 2013, the law will require plan sponsors to limit pre-tax FSA contributions per employee to no more than $2,500 per calendar year. Prior to PPACA, the accounts had no annual limits, according to the law firm Porter Wright in a recent online post.

Although the rule doesn’t kick in until next year, and even though the law’s fate remains unknown (see “PPACA Ruling May Have Limited Effect on Employers’ Plans”), Porter Wright advises employers with noncalendar year plans to start planning now for the new limit because it is tied to the taxable year of the participant. The law firm offers several options that these employers can take:

Impose new FSA limits at the start of the 2012-13 plan year
Keep the current limit but cut off 2013 contributions when they hit $2,500
Allow employees to prorate their contributions for the 2013 portion of the 2013-14 plan year
David Bergmann, a benefit expert in California, noted in a recent blog post that while the change may limit FSAs, they remain an attractive benefit.

“In the 30 percent tax bracket one has to make $1.42 before taxes to have $1 of after-tax dollar[s] to spend on medical or other expenses,” Bergmann wrote. While 42 cents may seem small, it adds up — and it means more money in employees’ pockets rather than in the government’s hands, Bergmann noted.

Despite limitations and compliance challenges, FSAs remain a popular benefit. About 33 million Americans use FSAs, according to the Minneapolis Star Tribune. And lawmakers are starting to recognize that some regulations, including the rule that bars the use of pre-tax FSA funds to purchase nonprescription medication, may be damaging the benefit. “It’s become a real wake-up issue,” Rep. Erik Paulsen, R-Minn., told the newspaper.

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