Like many small business owners, you may be unable to sponsor a major medical plan at this time. Perhaps you’ve thought about sponsoring a health Flexible Spending Account (FSA) instead. Unfortunately, under federal regulations, you may not be able to do that either. There is, however, a relatively new option available to you.
A company that doesn’t sponsor a major medical plan can’t sponsor a health FSA unless the FSA qualifies as an excepted benefit. To be excepted, your company’s FSA generally would have to reimburse only limited-scope dental or vision expenses.
Under guidance issued by multiple agencies in 2013, health FSAs generally must qualify as excepted benefits to comply with the Affordable Care Act (ACA). A health FSA that isn’t an excepted benefit will fail to satisfy the ACA’s preventive services mandate, which requires group health plans to cover certain preventive services without cost-sharing. The preventive services mandate doesn’t apply to excepted benefits.
Agency regulations establish different categories of excepted benefits and requirements for each category. One category excepts health FSAs, but only if other nonexcepted group health plan coverage (for example, major medical coverage) is made available for the year to the health FSA’s participants because of their employment. (Other requirements must also be met.)
Group health plans (including health FSAs) that provide only limited-scope dental or vision benefits may also qualify as excepted benefits — even if the employer doesn’t sponsor a major medical plan. If your company doesn’t sponsor a major medical plan, it shouldn’t adopt a health FSA unless the health FSA qualifies for the limited-scope dental or vision exception.
You might wish to consider another option — a qualified small employer health reimbursement arrangement (QSEHRA) — to help your employees pay for medical expenses. QSEHRAs can be offered by employers that aren’t applicable large employers under the ACA and don’t offer to any of their employees “group health plans” (a broadly defined term that includes major medical coverage as well as health FSAs, Health Reimbursement Arrangements and plans that provide only excepted benefits). The reference to applicable large employers generally means that QSEHRAs will be a viable option only for employers with fewer than 50 full-time and full-time-equivalent employees.
These arrangements can reimburse eligible medical expenses if they’re funded by direct employer contributions (not salary reduction), and reimbursements for the year don’t exceed the indexed statutory limits. (For 2019, those limits are $5,150 for self-only coverage and $10,450 for arrangements covering family members.)
Generally, QSEHRAs must be offered on the same terms to all eligible employees, and annual notices describing the arrangement must be provided. Also, everyone whose expenses will be reimbursed must have specified minimum essential coverage. Although QSEHRAs differ from health FSAs in important respects, they may be of interest to your company and other small businesses. Contact us for more info.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this impacts you.