Q: We are changing our eligibility for our health insurance from 20 hours per week to 30 hours per week. We were told that we must change our Flexible Spending Account definition of eligibility, as well. We still want to let our part-time employees pretax their out-of-pocket expenses, but we’re told that this is not allowed. Can only our full-time employees participate in our FSA plan?
A: You’re being told that you must change your Flexible Spending Account (FSA) definition of eligibility because the law that allows for pretaxing of out-of-pocket expenses only allows it because a health FSA is considered a group health insurance plan. As you know, under the Affordable Care Act (ACA) group health plans are regulated, and although the regulations applied to FSA plans do not appear to make sense, employers are still obligated to comply.
Before I go into the ACA regulation, let me explain the rule that does exempt FSA plans, or in legal terms, makes it an excepted benefit.
To be an “excepted benefit,” you must offer a group health insurance plan and your employer contribution cannot only be accounted toward employee FSAs of more than $500 or two times the employee annual salary reduction. In other words, as long as you offer a group health plan and you do not contribute more than $500 to a health Flexible Spending Account that you do not allow for other benefits or cash out, then you have an excepted benefit.
A health Flexible Spending Account has to follow the ACA guidelines, including no limits on out-of-pocket essential health benefits, and no out-of-pocket expenses for preventative care.
Now comes the catch.
You fit those requirements but want to offer the plan to individuals who are not eligible for your health insurance—in your particular situation, you want to offer FSA benefits to employees who are working less than 30 hours a week. Prior to the ACA, this was an allowed practice. However, for your part-time employees not eligible for your health insurance, your offered health FSA would be considered their group health insurance plan. And, as mentioned, to be a group health insurance plan you can’t have a out-of-pocket limit on essential health benefits.
A health FSA by the ACA requirements must have an out-of-pocket limit by definition of $2,550 (in 2015). Offering to employees not eligible for your group health insurance plan would lead to the excise tax of $100 per day per effected individual.
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