QUESTION: Our company has a few employees who only work two days a week and are not eligible for our major medical plan or other benefits. Could we offer these employees the opportunity to participate in our health FSA and DCAP?
ANSWER: You can offer your DCAP to the part-time employees who are not eligible for your company’s major medical plan. However, you cannot offer your health FSA to those employees unless it reimburses only limited-scope dental or vision expenses and otherwise qualifies as an excepted benefit.
Here’s why: Health care reform’s preventive services mandate requires group health plans to cover certain preventive services without cost-sharing. However, the preventive services mandate does not apply to excepted benefits. Thus, health FSAs generally must qualify as excepted benefits to avoid violating this provision (see our Checkpoint article).
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 available for the year to the health FSA’s participants by reason of their employment. A health FSA generally will not qualify under this provision unless the employer also maintains a major medical plan with an “eligibility footprint” that is the same as or larger than that of the health FSA. (Other requirements must also be met.) However, under another category, a group health plan (including a health FSA) that provides only limited-scope dental or vision benefits could qualify as excepted, even if it covers employees who have not also received an offer of major medical coverage by reason of their employment.
A health FSA’s failure to qualify as an excepted benefit could cause an employer to be liable for excise taxes of $100 per participant per day or other penalties under health care reform. Because your company does not offer major medical coverage to the part-time employees, the health FSA should not be offered to them unless it qualifies for the limited-scope dental or vision exception.
For more information, see EBIA’s Cafeteria Plans manual at Sections XIX.H (“Who Can Participate in a Health FSA?”), XXII.E (“Health Care Reform and Health FSAs”), XXII.K (“Which Health FSAs Are ‘Excepted Benefits’?”), and XXIII.D (“Who Can Participate in a DCAP?”). See also EBIA’s Health Care Reform manual at Sections V.F.1 (“Health Flexible Spending Arrangements Meeting Certain Conditions”) and VII (“PHSA Mandates: Consequences of Noncompliance”), and EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”).
Contributing Editors: EBIA Staff.