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.
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.