Healthcare flexible spending arrangements ("FSAs") allow employees to pay for eligible medical expenses with pre-tax dollars. As most employers know, beginning in 2013, ACA capped the amount an employee can contribute to a FSA at $2,500 per year. However, employers should also be aware that the legislation imposed additional important changes. Below are answers to important questions employers may have:
Can Employees Pay for Individual Health Insurance Policies Using FSA Dollars?
No. Employees cannot purchase individual policies, whether privately or through California's state-run exchange, Covered CA, using FSA funds. However, under IRS Notice 2013-54 (http://www.irs.gov/pub/irs-drop/n-13-54.pdf), an employer may make premium reimbursement arrangements on an after-tax basis.
Can Employers Offer a Health FSA Outside of a Section 125 Cafeteria Plan?
No. The ACA prohibits group health plans from placing annual dollar amount limits on the benefits payable to individual plan participants. ACA also prohibits cost-sharing for preventive services. In order to ensure that your FSA does not violate these prohibitions, it must be offered through a qualifying cafeteria plan under IRC section 125.
How Much Can An Employer Contribute to a Health FSA?
An employer's contribution to a health FSA must not exceed two times the employee's salary reduction election, or, if greater, $500 plus the amount of the employee's salary reduction election.
Can Participation in a Health FSA be offered to Part-Time Employees Not Covered By the Employer's Group Health Plan?
No. Health FSAs can only be made available in connection with a group medical health plan, therefore an employer cannot offer participation in the health FSA to part-time employees if it has chosen not to offer medical coverage under a group health plan to those employees.
How Should Employers Handle Improper Payments from a Health FSA?
The IRS recently addressed the issue of how to handle Health FSA payments for expenses that are not properly substantiated or are later determined to be ineligible for reimbursement. If the employer made the improper payment via a debit card, the employer must deactivate the debit card until the employee repays the cafeteria plan. There are potential tax implications for both employers and employees for amounts which cannot be recovered. The IRS' Chief Counsel Advice memorandum on this topic is available at http://www.irs.gov/pub/irs-wd/1413006.pdf.