The U.S. Department of Labor (the “DOL”) has issued FAQs about Affordable Care Act Implementation (Part XIX), which provide guidance on the health FSA carryover and excepted benefits under the Affordable Care Act (the “ACA”).
Here is what the FAQs say:
Excepted benefits provided under a group health plan generally are exempt from the Health Insurance Portability and Accountability Act (“HIPAA”) and ACA market reform requirements of ERISA, the PHS Act, and the Code. Under earlier regulations, health FSAs generally constitute excepted benefits if:
1. The employer also makes available group health plan coverage that is not limited to excepted benefits for the year to the class of participants by reason of their employment; and
2. The arrangement is structured so that the maximum benefit payable to any employee participant in the class cannot exceed:
a. two times the employee’s salary reduction election for the arrangement for the year; or,
b. if greater, $500 plus the amount of the participant’s salary reduction election).
On October 31, 2013, the Department of the Treasury and Internal Revenue Service issued guidance modifying the “use-or-lose” rule for health FSAs, to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate a grace period. The guidance provided that the carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under section 125(i) of the Code ($2,500 adjusted for inflation after 2012).
Unused carry over amounts remaining at the end of a plan year in a health FSA that satisfy the modified “use-or-lose” rule should not be taken into account when determining if the health FSA satisfies the maximum benefit payable limit prong under the excepted benefits regulations.