$2,500 Cap on Salary Reduction Contributions to FSAs Prompts Re-examination of the “Use It or Lose It” Rule

IRS Notice 2012-40, released May 30, 2012, provides guidance on the application of a cap (currently $2,500 but indexed for inflation) on salary reduction contributions to health flexible spending arrangements (“FSAs”) imposed by the Patient Protection and Affordable Care Act (the “ACA”). Significantly, the Notice states that due to the imposition of this $2,500 cap on health FSA contributions, the IRS and Treasury Department are re-examining the long-standing “use it or lose it” rule for health FSAs. In the attached memo, we discuss this further.