Can We Adopt a Health FSA Without Sponsoring a Major Medical Plan?
Question: Our company has only 35 employees and doesn’t sponsor a major medical plan. Can we adopt a health Flexible Spending Account (FSA) to help our employees pay for unreimbursed medical expenses with pretax salary reductions? If not, is another option available to us?
Answer: Unfortunately, your company can’t sponsor a health FSA unless the FSA qualifies as an excepted benefit. To be excepted, your company’s FSA generally would have to reimburse only limited-scope dental or vision expenses.
Under guidance issued by multiple agencies in 2013, health FSAs generally must qualify as excepted benefits to comply with the Affordable Care Act (ACA). A health FSA that isn’t an excepted benefit will fail to satisfy the ACA’s preventive services mandate, which requires group health plans to cover certain preventive services without cost-sharing. The preventive services mandate, however, doesn’t 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 (for example, major medical coverage) is made available for the year to the health FSA’s participants because 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 doesn’t 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. QSEHRAs can be offered by employers that aren’t applicable large employers under the ACA and don’t offer to any of their employees “group health plans” (a broadly defined term that includes major medical coverage as well as health FSAs, HRAs and plans that provide only excepted benefits). 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 if they’re funded by direct employer contributions (not salary reduction), and reimbursements for the year don’t exceed the indexed statutory limits. (For 2018, those limits are $5,050 for self-only coverage and $10,250 for arrangements covering family members.)
Generally, QSEHRAs must be offered on the same terms to all eligible employees, and annual notices describing the arrangement must be provided. Also, everyone 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 and businesses like yours.