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Is Your Health FSA an “Excepted Benefit”? If Not, It May Be Subject to PPACA

August 16, 2012

Evelyn Small Traub

Jeanne E. Floyd

This is the fifteenth in a series of advisories on Health Care Reform and other recent developments in health care.

Certain requirements under the Patient Protection and Affordable Care Act, such as the “Patient-Centered Outcome Research” fee (discussed here) and the Summary of Benefits and Coverage requirement, do not apply to “excepted benefits.” The term excepted benefits refers to benefits that have been excepted from the portability provisions of HIPAA. Excepted benefits include stand alone dental and stand alone vision coverage, stand alone retiree medical coverage and certain health flexible spending accounts (FSAs).

To be an excepted benefit, a health FSA must satisfy two conditions:

  • The maximum benefit payable to any participant for the year cannot exceed two times the salary reduction election under the health FSA for the year (or, if greater, the amount of the employee’s salary reduction for the health FSA for the year, plus $500); and
  • Other non excepted group health coverage (e.g., major medical) must be made available for the year to the participants by reason of their employment.

Thus, the health FSA is an excepted benefit if

  • the employer does not make any contributions to the FSA,
  • the employer makes a dollar-for-dollar match to the FSA, or
  • the employer contributes no more than $500 to the FSA.

Where the health FSA is part of a cafeteria plan under which the employer provides benefit credits that can be applied toward the health FSA, the FSA could fail the maximum benefit condition for an excepted benefit. If the benefit credit can be cashed out by the participant, then all contributions to the health FSA are considered to be salary reduction amounts and the health FSA will not fail the maximum benefit condition. However, if the credits cannot be cashed out or can only be partially cashed out, then the health FSA will fail the maximum benefit condition unless the amount of the credit that can be directed to the health FSA does not exceed $500. If the health FSA fails the maximum benefit condition, it does not qualify as an excepted benefit.

Please contact a member of the Troutman Sanders Employee Benefits and Executive Compensation practice group for additional information about the application of PPACA requirements if your FSA may not qualify as an excepted benefit.


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