What happens when a seemingly harmless change to your company’s easy-to-administer FSA plan — a plan that had met the ACA’s “excepted benefits” requirements — suddenly winds up becoming subject to a series of onerous regs?
That’s a subject Kate Saracene, an employment attorney for Nixon Peabody LLP, covered during a recent presentation at the 2017 Mid-Sized Retirement & Healthcare Plan Management Conference in Phoenix, Arizona.
Here are some of the highlights of that presentation.
‘Excepted benefits’ if …
One nice thing about FSAs for employers: These accounts can be exempt from headache-inducing ACA regs if they fall under the category of “excepted benefits.”
To qualify an “excepted benefits” for a “class of participants” an FSA much first be an Internal Revenue Code §106(c)(2) health FSA. In plan speak, that means the maximum reimbursement for the FSA must always be less than 5x the COBRA applicable premium.
Then, the FSA must satisfy two conditions:
- The employer contribution must not exceed the greater of: the employee salary reduction (1:1 employer match) or $500, and
- Other non-excepted Minimum Essential Coverage — aka major medical coverage — must be available to the eligible class of employees.
Loss of status
Employees get in trouble if they offer an FSA to employees who aren’t eligible for the company’s major medical coverage or it their contribution exceeds $500. If either of these happen, the FSA loses its excepted benefit status. That means the FSA becomes subject to the following ACA and othe federal regs:
- External appeals
- Preventive care
- Summary of Benefits and Coverage (SBC)
- HIPAA portability, and
- PCORI excise tax.
Here are two specific examples Saracene used:
- When an employer offers FSAs to part-time employees who aren’t eligible to receive coverage under the company’s major medical plan, and
- when a company offers employer contributions/flex credits that can be used only for pre-tax benefits with no cash-out option and the contribution exceeds $500. This is a mistake employers should be especially wary of.
Reason: As part of their strategy in 2017 to have flex credit count toward the employer subsidy for ACA reporting, many employers are limiting flex credits to pre-tax group health plan benefits, Saracene noted.
If you plan to employ this strategy, be sure the contributions don’t exceed $500 or, at least, offer a taxable cash-out option.
Non ‘excepted’ FSAs
What about the plans that never met the ACA “excepted benefit” requirements to begin with? Saracene suggests firms with these plans do the following to stay in compliance:
- never offer FSAs to workers who aren’t eligible for medical coverage,
- don’t contribute more than $500 or 1X the employee’s contribution as a match, and
- don’t allow flex credits to be contributed to an FSA in excess of $500 unless there is a taxable cash-out option.