QUESTION: Our company has only 35 employees and does not sponsor a major medical plan. Can we adopt a health FSA to help our employees pay for unreimbursed medical expenses with pre-tax salary reductions? If not, is another option available to us?
ANSWER: Unfortunately, your company cannot sponsor a health FSA unless the FSA qualifies as an excepted benefit and, to be excepted, your company’s FSA generally would have to reimburse only limited-scope dental or vision expenses.
Under agency guidance issued in 2013 (see our Checkpoint article), health FSAs generally must qualify as excepted benefits to comply with health care reform. A health FSA that is not an excepted benefit will fail to satisfy health care reform’s preventive services mandate, which requires group health plans to cover certain preventive services without cost-sharing. The preventive services mandate, however, does not apply to excepted benefits.
Agency regulations establish different categories of excepted benefits and requirements for each category. One category excepts health FSAs, but only if other nonexcepted group health plan coverage (e.g., major medical coverage) is made available for the year to the health FSA’s participants by reason of their employment. (Other requirements must also be met.) Group health plans (including health FSAs) that provide only limited-scope dental or vision benefits may also qualify as excepted benefits, even if the employer does not sponsor a major medical plan. Because your company does not sponsor a major medical plan, it should not adopt a health FSA unless the health FSA qualifies for the limited-scope dental or vision exception.
You might wish to consider another option, a qualified small employer health reimbursement arrangement (QSEHRA), to help your employees pay for medical expenses (see our Checkpoint article). QSEHRAs can be offered by employers that are not applicable large employers and do not offer group health plans (a broadly defined term that includes major medical coverage as well health FSAs, HRAs, and plans that provide only excepted benefits) to any of their employees. (The reference to applicable large employers generally means that QSEHRAs will be a viable option only for employers with fewer than 50 full-time and full-time-equivalent employees.) These arrangements can reimburse eligible medical expenses (as defined in Code § 213(d)), so long as they are funded by direct employer contributions (not salary reduction), and reimbursements for the year do not exceed the indexed statutory limits. (For 2018, those limits are $5,050 for self-only coverage and $10,250 for arrangements covering family members.) QSEHRAs generally must be offered on the same terms to all eligible employees, and annual notices describing the arrangement must be provided. Also, each individual whose expenses will be reimbursed must have specified minimum essential coverage. Although QSEHRAs differ from health FSAs in important respects, they may be of interest to your company.
For more information, see EBIA’s Cafeteria Plans manual at Sections XXII.K (“Which Health FSAs Are ‘Excepted Benefits’?”) and XXII.E (“Health Care Reform and Health FSAs”). See also EBIA’s Health Care Reform manual at Section V.C (“What Is a Group Health Plan?”), EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”), and EBIA’s Consumer-Driven Health Care manual at Section XXVII (“Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)”). You may also be interested in our recorded webinar “QSEHRAs and HRAs: Latest Developments” (recorded 3/21/2018).
Contributing Editors: EBIA Staff.