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IRS Announces 2022 Employee Benefit Plan Limits

The Internal Revenue Service (IRS) recently announced the cost-of-living adjustments to the applicable dollar limits for various employer-sponsored retirement and welfare plans for 2022. Most of the dollar limits currently in effect for 2021 will increase.

View the adjustments here.




Genetic Testing Kits and FSAs

The IRS issued a private letter ruling (PLR) this week indicating that an FSA (and presumably an HSA and HRA) may reimburse a portion of the purchase of genetic testing and reports regarding ancestry and health. The IRS noted that the health services portion of such a cost is a reimbursable medical expense under Code Section 213(d) because the tests fall under “diagnosis of a disease.” With respect to the genetic services incurred by the individual seeking the PLR, the IRS noted that the reports contained genotyping (a qualified medical expense), as well as general information and ancestry information (not a qualified medical expense). It is incumbent upon the taxpayer to allocate the cost for the reimbursement to the portion which was attributable to a qualified medical expense. IRS private letter rulings are only applicable for the taxpayer that requests it; however, this is helpful insight to IRS approach to genetic testing kits as Code Section 213 medical expenses.




The Basics of Health Savings Accounts and Health Flexible Spending Accounts

In a recent webinar, Jake Mattinson and Sarah Raaii discussed the basics of health savings accounts (HSAs) and health flexible spending accounts. They provided an overview of the various regulations surrounding HSA, such as eligibility requirements, high deductible health plans, and contributions and distributions, and cafeteria plans. Additionally, they analyzed the differences between HSAs and Health FSAs and HRAs.

View the full presentation.




Modification of “Use It or Lose It” Rule for Health Flexible Spending Arrangements

The Internal Revenue Service recently issued new guidance modifying the “use it or lose it” rule applicable to health flexible spending arrangements (FSAs) to allow carryover of certain unused health FSA amounts into the next plan year.

On October 31, 2013, the Internal Revenue Service (IRS) issued Notice 2013-71, which modifies the existing requirement that unused amounts in a health flexible spending arrangement (FSA) at the end of a plan year (or applicable grace period) must be forfeited. This new guidance permits an employer to amend its cafeteria plan, effective as early as the 2013 plan year, to allow up to $500 of unused amounts as of the end of the plan year to be carried forward for use in the following plan year. The tradeoff is that a health FSA cannot have both a grace period and a carryover feature; it is one or the other.

Carryover of Certain Unused Amounts Permitted

The “use it or lose it” rule applicable to health FSAs requires unused amounts remaining in a health FSA at the end of a plan year (or applicable grace period) to be forfeited. The new guidance now permits an employer to amend its plan to allow for up to $500 of unused amounts remaining in a health FSA at the end of a plan year to be carried forward to reimburse eligible expenses incurred in the next following plan year. While the employer can elect to allow less than $500 to be carried over into the next following plan year, the same carryover limit must apply to all plan participants. This $500 permitted carryover feature does not affect the $2,500 annual health FSA limit imposed by the Affordable Care Act. Thus, a participant with $500 remaining unused in his or her health FSA at the end of a plan year may be permitted to carryover the $500 into the next plan year, in addition to a maximum contribution of $2,500, for a potential total of $3,000 available reimbursement that next following plan year.

Under prior IRS guidance, health FSAs are permitted to include a two-month and 15-day grace period after the end of the plan year, during which a health FSA participant can incur eligible expenses and use the amounts contributed for the previous year to pay those expenses. The new guidance specifies that a plan that is amended to provide for the carryover of unused health FSA amounts into the following plan year cannot also have a grace period in place for that following plan year. Thus, an employer amending its plan to allow for carryover of unused health FSA amounts may also need to amend the plan to remove any existing grace period feature.

Deadline for Plan Amendments Allowing Carryover

Under the new guidance, an employer electing to allow for carryover of unused health FSA amounts must amend its plan to permit the carryover. This amendment must be adopted on or before the last day of the plan year from which amounts can be carried [...]

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Recent PPACA Guidance on New $2,500 Health FSA Limit

by Maureen O’Brien and Susan Nash

The Internal Revenue Service (IRS) recently released guidance on the implementation of the $2,500 limit on health flexible spending accounts (FSA) scheduled to go into effect in 2013.  IRS Notice 2012-40 (Notice) clarifies the application of the new limit for plan years beginning after 2013 and solicits comments regarding whether to modify the use-or-lose rule set forth in the current proposed regulations under Section 125 of the Internal Revenue Code of 1986, as amended (Code).

The Notice states that the $2,500 limit on contributions to health flexible spending accounts is applicable for plan years beginning on or after January 1, 2013.  This means that non-calendar year plans do not need to institute a mid-year limit to comply with applicable law.  In addition, the Notice states that the $2,500 limit does not apply to heath savings accounts or health reimbursement accounts or “flex-credits” granted by an employer.  In addition, for cafeteria plans under Section 125 of the Code with grace periods which allow use of contributions for up to two and one-half months after the end of the plan year, the $2,500 limit does not apply to any amounts contributed for the previous plan year and available during such grace period.

If an employee erroneously contributes more than $2,500 to his or her health flexible spending account for plan years beginning on or after January 1, 2013, the Notice provides for a correction method for employers to refund amounts over the limit to the employee and adjust the employee’s reportable wages for the applicable tax year.  This correction method is available only if the employer has complied with the written plan requirements of Section 125 of the Code, the erroneous contribution was due to reasonable mistake and not willful neglect by the employer and the employer’s cafeteria plan is not under examination for the plan year in which the erroneous contributions occurred.

The Notice also provides that employers may amend the cafeteria plan anytime prior to December 31, 2014 to comply with the new FSA limit.  Such amendment may express the limit as a maximum dollar amount or use another method to express the new $2,500 limit.  The $2,500 limit will be subject to cost of living increases and this type of indexing should be considered when drafting any required amendments.

Finally, the Notice requests comments on modifications to the use-or-lose rule for health flexible spending accounts currently in effect given implementation of the new dollar limit.  McDermott will continue to update employers on any changes to the use-or-lose rule for health flexible spending account plans.




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