Benefits Q&A: How do FSA Contribution Limits Apply to New Employees?

Question:

When new employees join our company mid-year and elect to participate in our health FSA, how much can they contribute to it? Do we have to prorate their maximum contribution? Or if they already contributed to an FSA this year through a previous employer, do they have to reduce their contributions to our FSA by the amount previously contributed to the other plan?

Answer:

Generally, employees who are hired mid-year may contribute up to the maximum limit on both employers’ plans. The main exceptions would be if:

• Your cafeteria plan document provides otherwise; or
• The previous employer is part of a controlled group or affiliated service group with the current employer according to IRS regulations. (These regs treat two or more employers as a single employer if there is sufficient common ownership or a combination of joint ownership and common activity.)

Similarly, an employee who works for both your company and an unrelated employer at the same time could contribute up to the maximum annual limit under both plans, assuming he is eligible to participate in both. Again, if both employers are part of a controlled group or affiliated service group, the employee’s FSA contributions to the two plans combined should not exceed the annual contribution limit.

Note also that an employer’s contributions to employee FSAs generally don’t count toward the employee’s maximum contribution limit.

Just make sure you educate employees on the “use it or lose it” nature of FSA contributions. They need to be very sure they will have sufficient unreimbursed medical expenses during the plan year to use up all of their contributions to their FSA. Otherwise, they may have to forfeit any funds that remain in their account at the end of the year.