Benefits and Compensation, HR Management & Compliance

Ask the Expert: Offering FSAs Without a Medical Plan?

In our latest installment of Ask the Expert, brought to you by the team of industry experts at HR Hero®, we look at a recent question from a subscriber wondering if employers can offer healthcare spending accounts to employees, such as FSAs and HSAs, without providing a medical plan. Let’s find out what our experts have to say…

employee benefits FSA

Q: Can a small employer offer an FSA if they do not offer a medical plan?

A: An employer generally may not offer a health flexible spending account (FSA) unless it also offers a major medical plan. This is due to the Affordable Care Act’s (ACA) “market reform” rules, which apply to large and small employers alike.

The market reform regulations include a prohibition on lifetime and annual limits and a requirement to cover certain preventive care services without cost sharing. FSAs need not comply with the ban on dollar limits if they are part of a cafeteria plan; however, they still run afoul of the first-dollar preventive coverage requirement (see 29 CFR 2590.715-2713).

FSAs do not have to comply with the above rules if they qualify as an “excepted benefit.” However, one of the prerequisites for being an excepted benefit is that the employer makes other group health coverage available to FSA participants on account of their employment (29 CFR 2590.732(c)(3)(v)). Therefore, if the employer is not offering such coverage, the “stand-alone” FSA will be in violation of the ACA and potentially subject to excise tax penalties.

QSEHRA: An Option for Small Employers

One option for small employers without major medical is to offer a qualified small employer health reimbursement arrangement (QSEHRA). Congress established these as a possible workaround for the ACA’s virtual ban on stand-alone FSAs and HRAs. QSEHRAs, available to employers with fewer than 50 full-time employees that do not offer other group health coverage, are excluded from the definition of a “group health plan” subject to the ACA.

A QSEHRA must meet these requirements:

  • The QSEHRA is funded only by the employer and not by any employee salary reduction contributions;
  • Reimbursements are limited to medical expenses, including insurance premiums, that are properly substantiated;
  • The amount of payments and reimbursements for any plan year does not exceed $5,450 (self-only) and $11,050 (family) in 2022; and
  • Plan terms are the same for all eligible employees.

For more detailed QSEHRA guidance, see the IRS’ Notice 2017–67.

Ask the Expert is a service provided to subscribers of BLR®’s HR Hero product, where experts are ready with answers to your organization’s unique questions surrounding HR compliance. To learn more and request a demo of HR Hero, click here.