Commentary: A recent technical release issued by the U.S. Department of Labor imposes severe dollar limits on employers wanting to make pre-tax contributions to the medical flexible spending accounts for eligible employees, where the employer chooses to not sponsor a group medical plan and the employee obtains his or her own coverage through a health exchange or marketplace under the Affordable Care Act.
Distributed on September 13, 2013, this new rule took effect for plan years beginning on or after Jan. 1. The release states that these rules will soon be issued in substantially identical form by the other two federal partners, the U.S. Treasury Department and Department of Health & Human Services.
This new regulation lacks clarity. In fact, the only place that specifies these employer flex credits contribution limits is in the Q&A section of the ruling. Hopefully the announcements generated by the Departments of Treasury and Health and Human Services will clarify the intent of this new ruling and provide specific examples. More small employers will likely drop their group health coverage with the launching of ACA health exchanges in 2014 (and the premium subsidies that many individuals and families qualified with no employer sponsorship). However, employers will find severe limitations in the amount of financial assistance they can offer their employees.
See also: 5 unique ways to spend FSA dollars
What does this technical release mean?
Essentially, unless an employer is sponsoring one or more group health plans, the employer is limited in the dollar amount of flex credits it is able to offer its employees under a flexible benefit plan. Put another way, if a companys employees are purchasing individual health insurance such as through an ACA exchange the employers tax-exempt contributions (i.e. flex credits) designed to help offset employees out-of-pocket costs are severely limited. The amount of flex credits that a participating employee can allocate to his or her FSA is determined in one of two ways: the maximum benefit condition or the availability condition. Without going into the detail on each of these scenarios, it is safe to say that:
- · If an employee is electing to redirect (contribute) $500 or less of salary in pre-tax dollars during a plan year to his or her medical FSA, then the employer can contribute a maximum of only $500 in flex credits to the employees FSA during that same plan year.
- · If the employee elects to redirect more than $500 of salary in pre-tax dollars into his or her FSA during a plan year, then the employer can match this amount up to twice the employees contribution in a non-discriminatory manner.
- · Under separate regulations issued earlier in 2013, the total amount going into the medical FSA from all sources for the Plan Year cannot exceed the $2,500 overall individual limit (a couple who both participate in separate FSAs can double this limit).
An internet search found one website covering these new limits, Peak 1; it offered some specific examples to further clarify the way this new rule might be implemented:
Conforming examples of health FSA funding meeting maximum benefit condition:
- · A one-for-one employer match (employer contributes $600, employee elects $600).
- · A two for one employer match not to exceed two times the participating employees salary redirection or if greater than twice, cannot exceed $500 plus the amount of the participants salary redirection (employer contributes $1,050, employee elects $550 for a total of $1,600)
- · An employer contribution of $500 or less (employer not greater than $500, employee elects $200).
Non-conforming examples of health FSA funding failing to meet maximum benefit condition:
- · An employer contribution of more than $500, if the employee contributes $500 or less (employer $600, employee $400).
- · An employer contribution in excess of a one-to-one match, if the employee contributes more than $500 (employer contributes $700, employee contributes $600).
As I side note, I should mention that I dont agree with the Peak 1 interpretation of this example. As I read these ambiguous rules, an employer is not able to fund an employees health FSA to the extent of $1,000 if the employee is only contributing $200 in redirected salary for the plan year because the $1,000 exceeds the $200 by more than double ($400); thus the maximum employer contribution under the less-than-$500 rule results in an adjusted maximum total of $700.
What is the effect to employers attempting to offer financial assistance?
With the launching of the ACA marketplaces last October, many small employers (those under 50 employees each working 30 hours or more in a typical workweek) considered abandoning their employer-sponsored health plan(s) to allow employees (and their families) to enroll in individual health plans through the state or federal exchanges and apply for a premium subsidy. Employers explored various options to financially assist their workforce aside from the most straightforward approach of increasing taxable salaries outside of an annual performance review (grossing up wages). At nearly every turn, employers and group benefit brokers have been frustrated.
- · First, health reimbursement arrangements paired with an individual (non-group) plan are barred because the ACA requires HRAs must be integrated with employer-sponsored health plans.
- · A more recent Internal Revenue Service guidance prohibited employers from reimbursing any portion of an employees health insurance premium for non-group coverage in pre-tax funds through what was often referred to as premium reimbursement plan.
- · At about the same time the IRS announced the $2,500 combined limit in the voluntary employee contributions and employer flex credits into an FSA in a plan year.
- · Now employers are bound by this new set of complex rules involving situations where an employer is looking to offer financial assistance to its employees (and their family members) exposed to potentially high medical out-of-pocket expenses under non-group health coverage.
Furthermore, if the employer contribution to employees medical FSAs is greater than $500 or is more than the employee contribution, the employer also must pay the comparative effectiveness research fee) of $2.00/participating employee for plan years beginning on or after Oct. 2, 2012. In future years the amount of the fee will be indexed to national health expenditures. This fee continues through Sept. 30, 2019 and includes self-insured medical plans and HRAs.
In conclusion, employers now have fewer benefit options under the ACA to financially assist their employees offset health care costs in pre-tax funds.
Ben Bosher, with Benefit Design & Strategies, LLC, is a group benefits broker practicing in Burlington, Vt.
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