Compliance Reminders for Health Care Flexible Spending Accounts (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

Health care flexible spending accounts (HCFSAs) are a valued employee benefit, but create administrative and compliance responsibilities for employers and their third party administrators. Permitted changes to how HCFSAs operate made in response to the COVID-19 pandemic added to these responsibilities. This issue of the Benefit Minute summarizes current compliance considerations for HCFSAs.

COVID-19 Relief

Much of the specific COVID-19 relief provided for in the CARES Act, the Consolidated Appropriations Act (CAA), and IRS and DOL notices has expired, but the following changes remain in effect:

  • The CARES Act permanently allows for reimbursement of over-the-counter medicines without a prescription and menstrual care products.
  • The CAA allowed for unlimited carryover or a 12 month grace period for HCFSA plan years ending in 2020 or 2021, if adopted by the plan. This provision may affect carryovers/grace period amounts that are available for plan years ending in 2022.
  • IRS Notice 2020-33 permanently allows the maximum carryover amount for a HCFSA to be equal to 20% of the HCFSA annual contribution maximum, if adopted by the plan. For plan years beginning in 2022, the maximum that can be carried over into 2023 is $570.
  • Disaster Relief Notice 2020-01 imposed an Outbreak Period tied to the National Emergency that delayed for up the one year the deadline for filing benefit claims and appeals. This includes HCFSA claims.  The Outbreak Period will remain in place until 60 days after the end of the National Emergency.

COVID-19 relief allowing for HCFSA mid-year election changes without a change in status event (if adopted by the plan) has ended and does not apply to plan year ending in 2022.

HCFSA and COBRA

A HCFSA is a self-insured group health plan subject to COBRA (if the employer is otherwise subject to COBRA). However, most HCFSAs qualify for a special exception that limits an employer’s obligation to offer COBRA coverage to certain situations.

Under this exception, COBRA must be offered if the HCFSA is “underspent” at the time of the qualifying event. A HCFSA is underspent if the remaining annual benefit (participant’s annual election minus the amount of submitted reimbursable claims) is more than the total COBRA premium that can be charged for the rest of the year. In addition, under this exception, COBRA for the HCFSA is only available until the end of the current plan year (not the full 18 month or 36 month COBRA continuation period).

In determining the remaining annual benefit, available carryover balance is considered. The monthly COBRA premium is generally the participant’s annual election less payroll deductions taken prior to the qualifying event divided by the number of months remaining in the plan year plus the 2% COBRA administrative fee. Carryover is not taken into account wen calculating the HCFSA COBRA premium.

For example, an employee elects $2,400 ($100/pay) for the HCFSA for the 2022 calendar year and has a carryover balance of $400. The employee terminates employment on April 30, 2022, after contributing $800 and submitting claims of $300 for reimbursement. The account is underspent ($2,500 remaining annual balance as compared to $1,632 total COBRA premium), so COBRA must be offered through December 31, 2022, with a monthly COBRA premium of $204. If the employee had submitted claims of $1,200, the account would have been “overspent” and there would be no obligation to offer COBRA.

HCFSA and QHDHP

An employee covered by a qualified high deductible health plan (QHDHP) and a HCFSA (including a spouse’s HCFSA) that pays or reimburses qualified medical expenses (a general purpose HCFSA) cannot generally make contributions to a health savings account (HSA) for that month. However, HCFSA run-out periods do not impact HSA contribution eligibility. The two exceptions that allow for HSA contributions are:

  • Limited purpose HCFSA that only reimburses dental and vision expenses
  • Post-deductible HCFSA that does not reimburse any qualified medical expenses until the minimum annual deductible for a QHDHP (currently $1,400 for individual coverage or $2,800 for family coverage) has been met.

The HCFSA plan document must specifically allow for a limited purpose or post-deductible HCFSA.

In addition, a HCFSA grace period or carryover can impact HSA contribution eligibility. HSA contributions are permitted during a general purpose HCFSA grace period if the balance in the HCFSA at the end of the prior year plan is zero. Otherwise, contributions to the HSA are not permitted until the first day of the month following expiration of the grace period, even if the balance is exhausted prior to the end of the grace period.

With regard to a HCFSA carryover, contributions to the HSA are not permitted for the full plan year if an employee has a carryover balance in a general purpose HCFSA (even if no new election is made). Options to allow for HSA eligibility include:

  • Carryover can be converted to a limited purpose or post-deductible HCFSA (if offered).
  • Participant can provide a written waiver of carryover executed before the end of the plan year.
  • HCFSA plan design can allow a carryover only if the participant re-elects for the next plan year.

Nondiscrimination testing

HCFSAs are subject to nondiscrimination testing under section 125 of the Internal Revenue Code (as part of the cafeteria plan) since HCFSA deductions are taken on a pre-tax basis and under section 105(h) of the Code (since a HCFSA is a self-insured medical plan.) In the event all the nondiscrimination requirements are not met, it may be necessary to change benefit elections and payroll amounts to bring the plan into compliance. Testing is recommended prior to the end of the plan year so that corrective action can be taken. HCFSA third party administrators generally perform the required testing using census information provided by the employer.

Form 5500

When the HCFSA is subject to ERISA, a Form 5500 fling is required if the HCFSA had 100 or more participants on the first day of the plan year. If the HCFSA is included in an ERISA wrap plan, it will be part of that Form 5500 filing. The Form 5500 must be filed within 7 months after the end of the plan year unless an extension is requested.

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