Could the Design of Your Health FSA be Exposing You to an Excise Tax of $100 per day per Participant?

Lyndsey Barnett

In December, we discussed why it is so important after the ACA for health FSA plans to be “excepted benefits.” In that blog post, we talked about the trap of employer credits and issues those can cause health FSAs. In this post, I want to explain several other practices which used to be common that cause a health FSA to not qualify as an excepted benefit. To reiterate the point we made in our prior post on this topic, health FSAs that are not excepted benefits would need to comply with all of the ACA mandates on benefit limits and preventive services, which is impossible under the health FSA regulations. Therefore, a health FSA that is not an excepted benefit could trigger an excise tax of $100 per day per participant per ACA violation (and there could be several violations). 

For a health FSA to be an excepted benefit it must satisfy the following two conditions: (i) the maximum benefit payable under the health FSA to any participant in the class for a year cannot exceed two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500; and (ii) other non-excepted group health plan coverage (e.g., major medical coverage) must be made available for the year to the same class of participants. This post is going to focus on requirement (ii).  

Prior to the ACA, some employers would offer their health FSA to classes of employees whom they didn’t offer their medical plan coverage. Other employers would offer the health FSA to all employees but may have a longer wait for medical coverage while allowing employees to participate in the health FSA right away. Both of these plan designs violate the availability condition and would cause the employer’s health FSA not to be an excepted benefit…which in turn subjects the employer to an excise tax of $100 per participant per day per ACA mandate that the health FSA violates. This inadvertent misstep can lead to a large penalty very quickly. Therefore, it is important that employers review the design of their health FSA to ensure that all participants eligible for the health FSA are also eligible for the medical plan and that the eligibility requirements for the medical plan are not more stringent than the health FSA requirements.