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CCH® BENEFITS — 06/01/10

Health Reform 2010, Limitation On Health FSAs Offered in Cafeteria Plans

from Spencer’s Benefits Reports: For the next few weeks, Spencer’s Benefits Reports will highlight specific provisions in the new health reform law which affect employer-sponsored plans.

Sec. 9005 of the Affordable Care Act concerns the limitations placed on health flexible spending arrangements (FSAs) offered in cafeteria plans.

Effective for tax years beginning after Dec. 31, 2012, a health FSA will not be a qualified benefit under a cafeteria plan unless the plan provides for a $2,500 maximum annual salary reduction contribution to the FSA. If the plan does not specifically prohibit salary reductions in excess of $2,500, the benefit under the health FSA will not be qualified. Under such circumstances, an employee will be subject to tax on distributions from the health FSA, thereby eliminating any of the tax benefits of health FSA contributions, including those under $2,500.

According to John Garner, a principal with Garner Consulting of Pasadena, Cal. and author of the Health Insurance Answer Book, there is a silver lining to the new limitation in that it will protect employees from large forfeitures and protect employers from employees who game the system by signing up for large amounts, submitting large claims early in the year and then terminating employment, leaving the employer stuck with the bill.

State Tax Consequences. The limitation of FSA contributions to $2,500 for tax years after 2012 will not impact states that conform to the federal exclusion because most states start their tax calculations with federal adjustable gross income. States that do not conform may allow an exclusion from taxation for amounts above the federal limitation as well.

The $2,500 limitation is adjusted annually for inflation effective for tax years beginning after December 31, 2013. Any inflation adjustment that is not a multiple of $50 will be rounded down to the next lowest multiple of $50.

Effective date. The amendments apply to tax years beginning after Dec. 31, 2012.

CCH Law, Explanation And Analysis Of Health Reform Act Available

CCH’s Law, Explanation And Analysis of the Patient Protection and Affordable Care Act of 2010 provides the most comprehensive and practical guidance available to professionals needing to make sense of this historic legislation. Included in the online version is the complete text of the law, integrating both the Affordable Care Act and the Health and Education Reconciliation Act. A hard-copy version of the book is available for $149.

For more information or to order the hard-copy version of the book, please call (800) 248-3248 or click http://hr.cch.com/Products/ProductID-7127.asp. Discounts are available for multiple copies.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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