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The Excepted Benefit Health FSA and the Eligibility Footprint Rule
The Affordable Care Act (ACA) sets specific standards that healthcare flexible spending accounts (Health FSAs) must meet in order to qualify as “excepted benefits.” When a Health FSA meets this classification, it is not subject to certain ACA market reform rules, such as requirements related to preventive care coverage and no annual or lifetime benefit.
To be treated as an excepted benefit, a Health FSA must satisfy two primary conditions:
Eligibility must align with the major medical plan (“footprint rule”)
Employees who are eligible to participate in the Health FSA must also be eligible for the employer’s group major medical plan. This concept is often referred to as the “footprint rule,” meaning the eligibility rules for the health FSA cannot have a bigger “footprint” than the eligibility “footprint” of the employer’s group major medical plan.
For example, if an employer requires employees to work at least 30 hours per week to qualify for its group health plan, that same threshold must apply to the health FSA. Similarly, if the medical plan has a waiting period—such as coverage beginning on the first day of the month after 60 days of employment—the health FSA must also be at least first of the month following 60 days of employment.
Employer contributions are limited
If the employer contributes to the health FSA, those contributions are capped at $500 per year, unless the employer matches employee contributions dollar-for-dollar. In a matching arrangement, higher contributions are permitted as long as they correspond directly to what the employee elects to contribute.
Additional compliance considerations
Employers that do not offer a group health plan are not permitted to offer a health FSA. In addition, the group health plan must be made available to any employee who is offered participation in the FSA in order to meet the excepted benefit requirements.
Importantly, employees are not required to enroll in the employer’s medical plan, but they must at least be eligible to do so.
Potential penalties for noncompliance
If a Health FSA fails to meet the criteria for excepted benefits, it becomes subject to ACA market reform rules. Noncompliance can result in significant penalties—up to $100 per day per affected employee under Internal Revenue Code Section 4980D.
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Core Documents’ Health FSA Plan Document
The Health FSA Plan Document Package Includes:
Summary of Plan Sponsor Responsibilities,
Resolution to Adopt the Health FSA,
Health FSA Plan Document,
Employee Summary Plan Description (SPD),
Election Forms, Claim Form, Change Form and
Complete Administration Guide.
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