QUESTION: Our company’s cafeteria plan includes a health FSA that has always been funded solely by employee salary reductions. For next year, however, we are thinking about adding an employer contribution feature to the health FSA, such as a matching or seed contribution. Would these employer contributions count toward the limit that applies to health FSAs?
ANSWER: The statutory limit (which is $3,200 for plan years beginning in 2024, and $3,300 for plan years beginning in 2025) applies only to health FSA salary reduction contributions. Nonelective employer contributions such as matching or seed contributions generally do not count toward the limit. But if employees may elect to receive the employer contributions in cash or as a taxable benefit, then the contributions will be treated as salary reductions and will count toward the limit if contributed to the health FSA.
Note that employer contributions also raise other compliance issues. For example, if employer contribution amounts vary among employees, the plan could fail to comply with the Code’s nondiscrimination rules. Also, for a health FSA to qualify as an excepted benefit, the maximum benefit payable for the year must not exceed two times the employee’s health FSA salary reduction election for the year or, if greater, the amount of the employee’s health FSA salary reduction election for the year plus $500. A health FSA’s failure to qualify as an excepted benefit will subject the employer to potential penalties under the Affordable Care Act and will trigger additional obligations under COBRA and other laws. Health FSAs funded exclusively by employee salary reductions (with annual coverage capped by the amount of the annual salary reduction election) will, by definition, satisfy this maximum benefit condition. But if employer contributions can also be allocated to employees’ health FSAs, care must be taken to ensure those contributions do not cause the health FSA to fail to meet the maximum benefit condition. Note that employer contributions that an employee can also elect to receive in cash or as a taxable benefit are treated as salary reductions for purposes of this condition, and that other requirements must also be met for a health FSA to qualify as excepted.
For more information, see EBIA’s Cafeteria Plans manual at Sections XIX.F (“Limitation on Health FSA Salary Reductions”), XII.D (“Nonelective Employer Contributions”), and XXII.K (“Which Health FSAs Are ‘Excepted Benefits’?”).
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