Accounting News

Thursday, June 21, 2012
IRS Issues Guidence on FSA Limit

The IRS has released some guidance on the spending limits for employee flexible spending accounts (FSA). Currently there is no limit on how much employees can contribute to their FSA vial payroll deductions. This is done pre-tax.

This limit is moving to $2,500 starting December 31, 2012 as part of the Patient Protection and Affordable Care Act of 2010. It will be indexed to inflation in future years. The clarification issued include:

  • The limit is per employee and a couple filing jointly may each contribute $2,500 for a total of $5,000.
  • If an employer allows the the money to carry over from plan year to plan year then the amount carried over does not count towards the next yeas limit.
  • Any amount paid over by the employee must be taxed as normal wages.
  • They are accepting comments concerning the "use-or-loose" requirements. 
Allowing employees to contribute to an FSA is a great benefit to employees. They can save money on their health care expenses. It also benefits the employer by reducing their payroll taxes. However, it does add another item of complexity for the payroll department.

It is always risky to manage payroll. The IRS sees payroll deductions as their money that the employer is just holding for them. To make it more difficult is changing tax laws can change the deduction rate several times a year if Congress keeps passing temporary laws. If you run your own payroll then make sure you consult with a payroll specialist to make sure you on staying on the right side of the law.

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