What It Means If Your Health FSA Is Not An “Excepted Benefit”

An “excepted benefit”  is a label and classification that was created to define certain health plans that are excepted from the HIPAA portability rules.  Regulators have confirmed that health benefits that qualify as “excepted benefits” do not have to comply with the new reform mandates under Health Care Reform.


Typically, most health FSAs are excepted benefits.  But FSAs that include employer contributions could cause the health FSA to lose its excepted benefit status in which case  there may be new reporting requirements starting as early as the end of 2012.


How to determine if your Health FSA meets the excepted benefit definition


Two simple conditions:


1.  Maximum Benefit Condition. The maximum benefit payable under the health FSA is the  total of employer plus employee contributions. The maximum benefit cannot exceed the greater of 1) two times the employee’s annual health FSA election, or 2) the employee’s annual health FSA election plus $500.

  •  Therefore, if the health FSA is funded exclusively by employee salary reductions, they will, by definition, meet the excepted benefits rule, if they also meet the Availability Condition (#2 below).
  •  A health FSA with employer contributions will satisfy the Maximum Benefit Condition only if the employer matching contribution does not exceed the greater of the participant’s salary reduction, or $500.

Examples of Health FSA Funding That Meet the Maximum Benefit Condition:

 – A one-for-one employer match (employer $600, employee $600).

– An employer contribution of $500 or less (employer $500, employee $200).Examples of Health FSA Funding That Do Not Meet the Maximum Benefit Condition:

– An employer contribution that is made regardless of whether the employee contributes (employer $500, employee $0)

– An employer contribution of more than $500, if employee contributes $500 or less (employer $600, employee $400).

– An employer contribution in excess of one-to-one match, if employee contributes more than $500 (employer contributes $700, employee contributes $600).


 2.   Availability Condition. There must be another non-excepted group health plan (like major-medical coverage) available to the class of employees that are eligible for the FSA.

The fact that employer contributions to a health FSA could make it lose its “excepted benefits” status is not new – but there are some new consequences because of health care reform. We recently issued a Compliance Roundup” memo about W-2 reporting, PCOR fees and the SBC. The memo was primarily about the new requirements for HRAs, but all three of those new obligations trickle down to a health FSA if it is not an excepted benefit.


If NEO manages your FSA plan, we will notify you if it does not meet the excepted benefit class and will advise you of what steps or new reporting obligations you have. In the meantime, please contact us if you have any questions about you plan, or how you might actually change your FSA plan design to gain excepted status!