Understanding the Rules on Health FSAs Under the Affordable Care Act

Health FSAs Exempt From Market Reforms Under Certain Circumstances

A health flexible spending arrangement (health FSA) is a popular benefit that employers offer to reimburse employees for certain medical expenses. As part of the implementation of the Affordable Care Act (ACA), new rules apply to health FSAs. The summary below is intended to help employers understand these new rules and remain compliant with the ACA.

Health FSAs Explained
In general, a health FSA is a benefit designed to reimburse employees for qualified medical care expenses (other than premiums) incurred by the employee, or the employee’s spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27. Contributions to a health FSA offered through a section 125 cafeteria plan do not result in gross income to the employee. Employees electing coverage under a health FSA typically choose to enter into a salary reduction agreement in order to make contributions to the health FSA. For taxable years beginning in 2016, salary reduction contributions to a health FSA are limited to $2,550.

In general, health FSAs are considered group health plans under the ACA, and thus are subject to the ACA market reforms explained below.

ACA Market Reforms
The ACA contains certain market reforms that apply to group health plans, including the:

  • Annual Dollar Limit Prohibition: A prohibition on any annual limit on the dollar amount of benefits for any individual; and
  • Preventive Services Requirement: A requirement that non-grandfathered plans provide certain preventive services without imposing any cost-sharing requirements for these services.

These market reforms, however, do not apply to a group health plan in relation to its provision of “excepted benefits.” Excepted benefits include, among other things, accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.

Health FSAs as ‘Excepted Benefits’
Although a health FSA is generally considered a group health plan, a health FSA may be considered to provide only excepted benefits if:

  • Other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer; and
  • The health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).

If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA is generally subject to the market reforms. Furthermore, a health FSA that is not offered through a section 125 cafeteria plan is subject to the annual dollar limit prohibition and will fail to comply with the annual dollar limit prohibition.

For more information on the ACA rules that apply to health FSAs, please read IRS Notice 2013-54.

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