The IRS recently issued new guidance related to health care flexible spending accounts (FSAs) that goes into effect Jan. 1, 2013. The Affordable Care Act establishes a $2,500 annual limit on contributions to health care FSAs. Notice 2012-40 clarifies the rules relating to the annual limit. Here are the key highlights:

• The $2,500 limit does not apply for plan years that begin before 2013. 
• The term "taxable year" refers to the plan's tax year (not the employer's or an employee's tax year), since this is the period for which salary reduction elections are made. 
• The $2,500 limit does not apply to contributions to a dependent care FSA, health savings account, adoption assistance, or health reimbursement arrangements.
• A plan year can only be changed for a valid business purpose. If a principal purpose of changing from a calendar year to a fiscal year is to delay imposition of the $2,500 limit, then the change is not for a valid business purpose.
• The $2,500 limit applies on an employee-by-employee basis. In other words, each eligible spouse may contribute up to $2,500, even if both spouses work for the same employer.
• All employers in a controlled group or affiliated service group are treated as a single employer for purposes of the limit.
• The $2,500 limit only applies to salary reduction contributions to a health FSA. The limit does not apply to employer non-elective contributions like flex credits, unless the employee can choose either receiving the flex credits as cash or a taxable benefit.
• If the FSA has a grace period (which may be up to 2�-months) for plan years beginning in 2012 or later, any amount carried over into the grace period will not count against the $2,500 limit for the subsequent plan year.
• The $2,500 annual limit will be indexed for inflation for plan years beginning after Dec. 31, 2013.

The IRS requested comments on the "use-it-or-lose-it rule." In light of the $2,500 limit, the IRS is considering whether the "use-it-or-lose-it rule" should be modified. We will keep you posted on any developments.