Question: Can an employer’s health FSA eligibility rules be different from the major medical plan?
Compliance Team Response:
Health FSAs must be considered an “excepted benefit” to avoid violating the ACA market reform provisions.
The general requirements for a health FSA to be considered an excepted benefit (and therefore not subject to the ACA market reform provisions) are:
- The Footprint Rule: All employees eligible for the health FSA must also be eligible for the major medical plan; and
- The $500 Rule: Employer nonelective contributions to the health FSA cannot exceed $500.
Health FSA Footprint Rule
All employees eligible for the health FSA must also be eligible for (regardless of enrollment in) the major medical plan. This is sometimes referred to as the health FSA “footprint rule.”
In other words, the footprint rule requires that the health FSA eligibility “footprint” be no broader than the major medical plan.
To be clear, this rule does not go in the other direction. It is fine if an employee is eligible for the major medical plan but not the health FSA.
ACA Penalties for Violating Footprint Rule
The ACA has rendered non-excepted health FSAs unlawful and subject to $100/day/employee penalties under IRC §4980D for violation of the ACA market reforms.
Employees who are eligible for the health FSA must also eligible for the employer’s major medical plan. Employers should be careful with eligibility rules to avoid this ever being a potential issue.
29 CFR §2590.732(c)(3)(v)(A):
(c) Excepted benefits.
… (v) Health flexible spending arrangements. Benefits provided under a health flexible spending arrangement (as defined in section 106(c)(2)) are excepted for a class of participants only if they satisfy the following two requirements—
(A) Other group health plan coverage, not limited to excepted benefits, is made available for the year to the class of participants by reason of their employment; and
(B) The arrangement is structured so that the maximum benefit payable to any participant in the class for a year cannot exceed two times the participant’s salary reduction election under the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). For this purpose, any amount that an employee can elect to receive as taxable income but elects to apply to the health flexible spending arrangement is considered a salary reduction election (regardless of whether the amount is characterized as salary or as a credit under the arrangement).
DOL Technical Release 2013-3:
2. Application of the Market Reforms to Certain Health FSAs
Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits?
Answer 7: The market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits 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 health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). See 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R. §2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms.
If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.
(b) Amount of tax.
(1) In general.
The amount of the tax imposed by subsection (a) on any failure shall be $100 for each day in the noncompliance period with respect to each individual to whom such failure relates.
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