From the Hotline: Timeline For the New FSA Maximum

Question: Is the new FSA maximum of $2,500 based on the calendar year or the plan year if it falls outside of January to December?

Answer: This is based on the plan year, not the calendar year.  The IRS issued additional guidance (http://www.irs.gov/pub/irs-drop/n-12-40.pdf) that clarifies this issue as follows:  “Because employees make salary reduction contribution elections for health FSAs only on a plan year basis (see Prop. Treas. Reg. § 1.125-2), the term “taxable year” in § 125(i) (which does not specify that it refers, for example, to the employee’s taxable year or to the employer’s taxable year) refers to the plan year of the cafeteria plan. Similarly, the reference to “taxable year” in the effective date provision of § 125(i) refers to the plan year of the cafeteria plan. Accordingly, the $2,500 limit on health FSA salary reduction contributions applies on a plan year basis and is effective for plan years beginning after December 31, 2012.”