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December 17, 2015

Do Our Contributions Count Toward the Health FSA Limit?

Question: Our company’s cafeteria plan includes a health Flexible Spending Account (FSA) that has always been funded solely by employee salary reductions. For next year, however, we’re thinking about adding an employer contribution feature ― such as a matching or seed contribution. Would these employer contributions count toward the limit that applies to health FSAs?

Answer: The statutory limit ($2,550 for plan years beginning in 2015 or 2016) applies only to health FSA salary reduction contributions. Nonelective employer contributions, such as the matching or seed contributions you mention, generally don’t count toward the limit. But if employees may elect to receive the employer contributions in cash or as a taxable benefit, the contributions will be treated as salary reductions and will count toward the limit if contributed to the health FSA.

Employer contributions may also raise other compliance issues. For example, if the employer contribution amount varies among employees, the plan could fail to comply with nondiscrimination rules.

Also, for a health FSA to qualify as an excepted benefit, the maximum benefit payable for the year must not exceed:

  • Two times the employee’s health FSA salary reduction election for the year, or
  • If greater, the amount of the employee’s health FSA salary reduction election for the year plus $500.

A health FSA’s failure to qualify as an excepted benefit may subject you to potential penalties under the Affordable Care Act and could trigger additional obligations under COBRA and other laws.

Health FSAs funded exclusively by employee salary reductions (with annual coverage capped by the amount of the annual salary reduction election) will, by definition, satisfy the “maximum benefit payable” condition described above. But if employer contributions can also be allocated to employees’ health FSAs, care must be taken to ensure those contributions don’t cause the health FSA to fail to meet the condition.

Finally, remember that employer contributions that an employee can also elect to receive in cash or as a taxable benefit are treated as salary reductions for purposes of the “maximum benefit payable” condition, and that other requirements must also be met for a health FSA to qualify as excepted.

© 2015

If you have questions regarding the Affordable Care Act, contact an Anders advisor..

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