Best be careful how you have your plan set up, lest it be deemed "Un-Excepted."
Prior to the ObamaTax, FSA plans weren't terribly complicated or subject to many regs. That's all changed, and employers that get caught unaware of these changes face some significant additional costs.
"Excepted" FSA plans continue to enjoy tax-advantaged status and the various benefits that accrue to both the employer and employee in these arrangements. But plans that "fail the test" will be required to pay the Patient-Centered Outcomes Research Institute (PCOR) fee.
And in case you were wondering:
"The amount of the PCORI fee is equal to the average number of lives covered during the policy year or plan year multiplied by the applicable dollar amount for the year ... For policy and plan years ending after Sept. 30, 2013, and before Oct.1, 2014, the applicable dollar amount is $2."
Now, that may not seem like a lot, but if you have hundreds - or thousands - of employees, that two bucks can add up in a hurry.
But wait, that's not all!
In addition to the PCOR fee, employers whose plans have been ruled as "Un-Excepted" will be on the hook for "unlimited preventive services upon 2014 renewal." This means that, even if there's no actual cash left in an employee's account, the employer will have to pay for unreimbursed preventive care expenses.
Let's say Joe has $1,000 in his FSA, and blows through that by September. If he then has a routine physical in October, and the insurance pays all but $150 of it, the employer is on the hook for that extra $150. Again, that may not seem like a lot, but what if there are hundreds of employees playing that game?
And there's this:
If an employer has an "Un-Excepted" plan and is contributing $500 or more each year to each employee's FSA, then that contribution will now have to be "cashable;" that is, an employee can simply cash it out (he'll be liable for the taxes, natch).
So how does an employer keep on the straight-and-narrow? Well, there are two major criteria for maintaining "Excepted" status:
First, there's a limit on the maximum benefit payable under an FSA plan (this comes into play primarily on those plans where the employer also contributed).
Second - and this one's a doozy - there's the "Availability Condition." The helpful folks at FlexBank explained that there are several components to this condition. First, participation eligibility by class. That is, "so long as all of the employees in a class of participants eligible for the health FSA are also eligible for major medical coverage and the entry dates for both are the same, the Availability Condition will be satisfied.”
For example, Jiffy Widgets offers group insurance only to full-time employees, but opens up its FSA plan for everyone, full- or part-time. That's a no-no. Jiffy could offer group and FSA to only full-timers, but can't mix-and-match.
Then there's the waiting period. Some employers will allow new employees to start up an FSA their first day on the job, but require a 90 day wait to go on the group plan. That's now a no-no.
Finally (well, as far as this post goes), an FSA is considered "Un-Excepted" if the employer doesn't offer group health insurance. So all those employers that are considering deleting their group cover will have to now consider whether their FSA is important, because dropping the group but keeping the FSA means additional costs (which might eat up a substantial portion of the anticipated savings).
Want to know more? Well, our friends at FlexBank have graciously permitted us to link their FAQ, which has more detailed information.