Affordable Care Act Trap For Some FSAs With Employer Credits

Jamie Scott

Prior to 2014, flexible spending accounts (FSAs) have been exempt from many group health plan rules, such as COBRA and HIPAA portability, by qualifying as an “excepted benefit” under applicable guidance. Because most FSAs qualify as an excepted benefit, the actual requirements for the exemption have received little attention. However, in 2014 it will become more important for an FSA to qualify as an excepted benefit so that the FSA is not subject to the mandates of the Affordable Care Act (ACA). FSAs normally are not able to satisfy the ACA mandates on benefit limits and preventive services and so failing to qualify as an excepted benefit could trigger excise taxes on the plan sponsor of $100 per participant per day.   

One of the requirements for an FSA to qualify as an excepted benefit is that the participant’s salary reductions plus any employer contributions to the FSA must not exceed the greater of (i) two times the participant’s salary reduction and (ii) the participant’s salary reduction plus $500.

Identifying what is an employer contribution for this test is not as easy as you might think. Contributions credited by the employer directly to the FSA are employer contributions and would be limited to the amount of the participant’s salary reduction contributions or, if greater, $500. Flex dollars that the employer credits and that participants may choose to allocate to the FSA or receive in cash are actually treated as participant salary reduction contributions for this test and would not cause the FSA to fail to qualify as an excepted benefit.

But, the problem arises if the employer flex dollars are not allowed to be cashed out at 100%. Many cafeteria plans provide for a forfeiture of half (or some other percentage) of any flex dollars that are cashed out of the plan. If flex dollars are not available to be cashed out at 100%, any of those dollars allocated to the FSA are treated as employer contributions and must be capped so that when they are combined with the participant’s salary reduction, the FSA can still qualify as an excepted benefit.

Think of this situation. An employer provides $1,000 of flex dollars that a participant may use to purchase health insurance, contribute to the participant’s FSA or be cashed out. Participant A waives health insurance coverage and elects to have all $1,000 of flex dollars contributed to the FSA along with his own salary reduction contribution of $600. If Participant A had the option to cash out all $1,000 of flex dollars, the contribution of those dollars to the FSA would be treated as additional salary reduction contributions and would not jeopardize the excepted benefit status of the FSA. If, however, the plan’s cash out provision included a forfeiture of any portion of the cash that could have been elected by Participant A, then Participant A’s allocation to the FSA would be treated as an employer contribution and would prevent the FSA from qualifying as an excepted benefit.

Employers that make flex dollar contributions should review the cash out provisions of the cafeteria plan to make sure they do not cause the FSA to be subject to the requirements of the ACA.     

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