Does Your FSA Plan Meet ACA’s Excepted Benefit Requirements?

Your organization’s health plan is not the only employee benefit that will be affected by the Affordable Care Act (ACA) in 2015. Employers that offer a flexible-spending account (FSA), or a cafeteria plan, need to be aware of new mandated requirements established under ACA, and set to go into effect for plan years beginning on or after Jan. 1, 2015. 

The new mandate will require employers with FSA plans that do not meet the definition of an excepted benefit, to make required plan changes in 2015 if they intend to continue offering an FSA plan to their employees. 

In the fall of 2013, the U.S. Treasury Department issued an ACA notice, which eliminated an employer’s ability to offer a stand-alone health FSA, or other tax-advantaged arrangement (such as a health-reimbursement arrangement or a premium-reimbursement arrangement), that would help employees to pay for individual health policies, tax-free. The notice did preserve all health FSAs that meet the definition of an “excepted benefit,” however. 

Excepted benefits, created under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), are benefits that offer health or health-related coverage that were not originally subjected to HIPAA’s health-insurance requirements. Today, post ACA, benefits that were excepted under HIPAA are not subject to ACA’s market reforms (such as annual limits, or pre-existing condition clauses), but also do not fulfill the individual-responsibility requirements established under ACA. This means that excepted benefits offered by an employer do not disqualify an employee from eligibility to receive health-insurance premium tax credits toward buying individual coverage through a state marketplace exchange. 

This new ACA mandate now requires FSA plans to meet two new conditions in order to be considered a HIPAA-excepted benefit. One, only individuals eligible for employer-provided major-medical coverage can be offered the health FSA. Two, the health FSA must limit the maximum reimbursement payable to an enrollee to two times the participant’s salary reduction or, if greater, the participant’s salary reduction plus $500. These seemingly straightforward requirements have the potential to greatly affect your company.

First, this new ACA mandate requires that your organization’s health FSA and major-medical plan share eligibility criteria, and more specifically, that your organization’s health-benefit plan meets all required mandates previously established under ACA, such as minimum value and affordability requirements. 

To determine if your plan will meet excepted-benefit criteria, begin your analysis with your eligibility requirements. Perhaps your corporation offered your FSA plan to only a certain class of employees, or to a specific collectively bargained unit. If your FSA eligibility differed from that of your health plan, even if due to collectively bargained arrangements, eligibility changes will need to be made to your plan in preparation for the 2015 plan year. This may mean opening your FSA plan up to a larger employee population, or restricting it to a smaller population, depending on your specific eligibility criteria. If this new requirement will expand your FSA offering to a larger number of employees, it may impact your plan financially, if your FSA includes an employer contribution for enrolled employees. 

Regarding the contribution requirement, the mandate sets limitations on the amount of money that individuals can set aside — pre-tax, in their FSA, based on a percentage of their salary. A health FSA plan that meets excepted-benefit requirements must limit the maximum reimbursement payable to an enrollee to two times the participant’s salary reduction or, if greater, the participant’s salary reduction plus $500. This means that you may contribute up to $500 as an employer, per individual, or up to a dollar-for-dollar match of each individual’s employee election. To ensure compliance with this part of the mandate, review your employee-contribution rules for each class of eligible employees. If your plan is now contributing more than these limits to all or any class of employees, changes will need to be made before 2015 to maintain your plan’s status as an excepted-benefit plan.

What does it mean if you have determined that your plan currently doesn’t meet one, or either, of the requirements? It means your FSA plan would be subject to the same ACA market reforms that are required of health-benefit plans, such as a prohibition on lifetime annual limits and cost sharing for preventive services. If you are wondering how an FSA plan could ever comply with such criteria, the answer is it could not. By definition, a health FSA plan could not comply with ACA’s market reforms. If your plan does not meet excepted-benefit requirements, and if your company chooses not to make the changes necessary to maintain an excepted status, your plan would not be allowed under IRS Notice 2013-54.

For employers offering a cafeteria plan that allows participants to use pre-tax plan dollars to pay for their individual policy, know that the Internal Revenue Service (IRS) and the Treasury Department will no longer allow this pre-tax, premium-payment arrangement. The IRS and Treasury Department fear that if individuals are allowed to pay for individual-policy premiums with cafeteria funds, it may encourage employers to terminate their group health coverage. That would force employees, in turn, to seek individual coverage on a state health exchange, and to pay for coverage with tax-free dollars reimbursed by their employer.

Also, employers with non-calendar-year cafeteria plans must allow their employees to make a one-time status change. This mandate will require companies offering cafeteria plans to amend their plan to allow this added status change. The purpose of this requirement is to accommodate those employees who wish to seek coverage on the state exchange. Since exchange-plan options are generally effective Jan. 1, an individual enrolled in a cafeteria plan with a July 1 effective date, for example, would not be eligible to change her election to accommodate her enrollment in an exchange health plan come Jan. 1.

Finally, the newest regulations regarding excepted benefits were released on Oct. 1. This final rule amends current regulations to treat employee-assistance programs (EAP) meeting certain conditions as excepted benefits. EAPs are considered to be excepted benefits if they are free to employees, not coordinated with other employee group-health-benefit plans, and if they do not provide significant health-care benefits. 

For self-funded employers, the final rule also states that self-funded dental and vision plans will qualify as excepted benefits, even if they do not require employee contributions. This is consistent with the excepted-benefit status associated with fully insured vision and dental plans, and self-funded dental and vision plans, that do require an employee contribution, yet are considered excepted benefits.

Employers whose current benefit plan design does not currently meet the definition of an excepted-benefit plan should work with their administrator, consultant, or broker to discuss the goals of the plan and determine the appropriate strategic changes that will enable compliance without compromising the quality of benefits offered to employees. With 2015 approaching, it is not too late to prepare your plan and your employees for 2015 compliance.

Vanessa Flynn is vice president of client services at POMCO.