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June 01, 2012 at 09:44 AM
The Internal Revenue Service (IRS) says the new $2,500 cap on workers’ annual flexible spending arrangement (FSA) contributions may make the much-hated use-it-or-lose-it rule obsolete.
The IRS created the use-it-or-lose-it rule in the first place to keep a high-paid worker from abusing the program by using an FSA to defer paying paying taxes by feeding a large amount of salary into the FSA, officials say in IRS Notice N-12-40.
Now that the Patient Protection and Affordable Care Act of 2010 (PPACA) has set a relatively low limit on annual contributions, the IRS might be able to provide at some administrative relief, officials say.
“Comments are requested on whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and, if so, how any such flexibility might be formulated and constrained,” officials say. “Comments are also requested on how any such modifications would interact with the $2,500 limit.”
IRS officials also talked about how they will implement the $2,500 contribution cap.
The limit, established in Section 125(i) of the Internal Revenue Code, will apply to plan years starting after Dec. 31, 2012.
The IRS will start indexing the $2,500 limit for plan years starting after Dec. 31, 2013.
