United States: Most Health FSAs Will Qualify For Exemptions To The New PCORI Fee

Last Updated: July 17 2013
Article by Eddie Adkins and Jeff Martin

IRS guidance has offered an exemption from a new fee enacted to help fund the Patient-Centered Outcomes Research Institute (PCORI) that will apply to most flexible spending accounts (FSAs).

The PCORI fee must be paid by certain employers that sponsor self-insured health plans by July 31, 2013, and the overall rules are covered in Tax Flash 2013-07. This tax flash discusses how the PCORI fee applies to health FSAs.

As noted in Tax Flash 2013-07, an employer that sponsors a self-insured health plan must pay the PCORI fee for the plan. The general rule is that an FSA is treated as a self-insured plan. However, an FSA is exempt from the PCORI fee if two requirements are met.

The first requirement is that group health plan coverage be made available to the FSA participant by the employer for the year. The coverage may be either self-insured by the employer or a fully insured plan sponsored by the employer. In our experience, most employers that offer FSAs also offer group health coverage and satisfy this requirement.

The second requirement is that the FSA provides that the maximum benefit payable by the FSA to the participant for a year does not exceed the greater of:

  • two times the participant's salary reduction election under the FSA for the year, or
  • $500 plus the amount of the participant's salary reduction election.

For purposes of this rule, a salary reduction election is any amount an employee can elect to receive as taxable income but instead elects to contribute to the FSA. In our experience, many FSAs consist of only salary reduction contributions (i.e., no employer contributions), and the maximum benefit payable equals the amount of the salary reduction contribution. Thus, many FSAs also meet the second requirement.

However, FSAs may fail to satisfy the second requirement in certain situations. Employers that provide "flex credits" or employer contributions to an employee's FSA must carefully determine whether the FSA satisfies the required limit for the maximum benefit payable under the FSA.

Special purpose FSAs

An FSA may also be exempt from the PCORI fee if the benefits covered under the FSA are limited to so-called "excepted benefits" under Section 9832(c). These FSAs are sometimes referred to as "special purpose FSAs." In our experience, these FSAs are not common.

Excepted benefits include but are not limited to:

  • coverage for only accident or disability income insurance,
  • liability insurance and coverage issued as a supplement to liability insurance,
  • workers' compensation or similar insurance,
  • automobile medical payment insurance, and
  • coverage for onsite medical clinics.

Other benefits are excepted benefits if they are offered separately from group health insurance, including:

  • dental benefits,
  • vision benefits, and
  • benefits for long-term care, home health care and nursing home care.

Benefits that are offered through independent coverage that is not coordinated with any other plans maintained by the employer are also excepted benefits, including:

  • coverage for a specified disease or illness, and
  • hospital indemnity or other fixed indemnity insurance.

FSAs that cover only these excepted benefits are exempt from the PCORI fee even if the participant is not eligible for other group health coverage or the maximum benefit payable under the FSA exceeds the limit described previously.

FSAs and self-insured plans

An employer that maintains FSAs that do not meet the exemption requirements may still not be required to pay a separate PCORI fee for the FSAs. An FSA is generally treated as a self-insured plan. If two or more self-insured plans are maintained by the same employer and have the same plan year, the plans are treated as a single plan for purposes of calculating the PCORI fee. For example, if an employer maintains a self-insured plan that provides major medical benefits and also maintains FSAs with the same plan year, the plan and the FSAs are treated as one plan. This means that the same life covered under each plan counts as only one covered life for purposes of calculating the PCORI fee.

FSAs and fully insured plans

In contrast, an employer with a fully insured plan and FSAs will be required to pay the PCORI fee on the lives covered under the FSAs unless the FSAs otherwise qualify for exemption based on the rules described previously. This is because the insurer is required to pay the PCORI fee on the lives covered by the fully insured plan, while the employer is required to pay the PCORI fees on the FSAs. The fully insured plan and the FSAs cannot be treated as a single plan for PCORI fee purposes.

Calculating the average number of covered lives for a plan year

Employers that are required to pay the PCORI fee for FSAs must determine the average number of lives covered under the FSAs for the year. The rules for calculating the average number of covered lives differ based on the type of other coverage made available to the FSA participants.

If an employer does not maintain a self-insured plan other than the FSAs, the employer may use a special counting rule and treat each participant's FSA as covering a single life. For example, if an employer maintains FSAs but no other self-insured plan, and 500 employees participate in the FSAs for the full year, the average number of lives covered for the year under the FSAs is 500. The employer is not required to include any spouses, dependents or other beneficiaries as lives covered under the FSAs. This differs from the counting rules that apply to other self-insured plans, whereby spouses and dependents must be counted as covered lives, in addition to employees.

This same special counting method may also be used for an employee's FSA when the employer maintains a self-insured plan in addition to the FSA, but the employee elects to participate only in the FSA and not in any other self-insured plans offered by the employer.

On the other hand, if the employee participates in both an FSA and another self-insured plan, the special counting rule does not apply. The covered lives in the FSAs for these participants must be counted in accordance with the usual method (i.e., all lives are counted, including spouses and dependents). However, as noted earlier, the fact that plans with the same plan year are treated as a single plan will avoid counting a covered life more than once in situations where the FSA has the same plan year as the other self-insured plans.

Next steps

The rules for determining the applicability of PCORI fees to FSAs are complex. Employers should carefully review their FSAs and these rules to properly calculate PCORI fees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Eddie Adkins
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.