Brian Gilmore

@Christine Roberts I agree, these are on the upswing. As soon as the FSA TPAs start offering it, you can tell there's at least a push to create a market for them. I've heard from a couple clients that they are popular in Canada and that's why they're starting to be offered here. My basic feeling is it doesn't really matter how you classify an LSA because it's not an ERISA benefit and it's not tax-advantaged. So there is not set legal scheme we're trying to make it operate within. The constructive receipt question is one where I think the IRS is going to have to weigh in at some point on both LSAs and employee rewards programs. They both offer a bucket of funds (sometimes with a specific "coin of the realm" in the form of points that act as funds) that can be used or converted to purchase items. While there is an argument that the doctrine of constructive receipt should apply to make the amount available taxable (as opposed to the amount used/reimbursed), I have never seen an employer actually take that position in practice. Every employer I have seen with this type of arrangement has made only the amount used/reimbursed taxable to the employee. But I agree that in theory the §451 constructive receipt rules seem to potentially apply to make the amount made available taxable. This is the best post I've seen tackling that issue: https://www.thetaxadviser.com/issues/2011/jan/takacs-jan2011.html

@RubiksCube Employers can always limit the FSA eligible expenses through the terms of the Section 125 cafeteria plan document. From a practical perspective, employers generally always permit the universe of eligible expenses to be reimbursed under the FSA. Limiting expenses to only a subset of FSA-eligible expenses creates a few concerns I can think of: Employee communication issues and misunderstanding; Additional forfeitures; Reduced elections (and thereby reduced employer tax benefit from the employer-share of FICA); Incorrect plan materials (because so many materials are templates prepared by the FSA TPAs. Generally I think you'd have a significant employee relations issue by deciding to continue imposing the Rx requirement on OTCs. Plus, part of the motivation was to avoid the need to waste the time of medical practitioners by writing scripts for OTC medicines and drugs. On an interesting sidenote, keep in mind that the CARES Act also added menstrual care products to the list of eligible FSA (and HSA/HRA) expenses. It didn't add those products as a 213(d) expense though. Instead, it directly amended 223 and 106 to provide that they "shall be treated as incurred for medical care." So there's an interesting trivial pursuit answer as to a non-213(d) FSA-eligible expense. There are also some 213(d) expenses (e.g., premiums) that can't be reimbursed through an FSA.

@Nubee What you're describing actually isn't an opt-out credit, but rather cashable flex credits. That is a problem for ACA affordability issues because flex credits need to be designed as "health flex contributions to count toward the employer-share of the premium. Cashable flex credits are not health flex contributions for this purpose. Here's an overview: https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/ How Do Flex Credits Affect the Affordability Determination? Flex credits will reduce the dollar amount of the employee-share of the cheapest plan option providing minimum value that is used to determine affordability if they meet a three-part test to qualify as a “health flex contribution”: The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit); The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and The employee may use the amount exclusively for medical/dental/vision coverage costs. Action Item: If you offer a defined contribution-style flex credit approach to employees, make sure that a sufficient portion are designated as “health flex contributions” to qualify under an affordability safe harbor. This will require at least some of the flex credits be non-cashable and designated for health plan purposes only. For more details, see our ABD Alert How the ACA Affects Flex Credits.

Keep in mind there are ACA employer mandate affordability considerations with opt-out credits. The approach you described might not quite fit an "eligible opt-out arrangement" without some additional tweaking. Here's a short summary: https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/ How Do Opt-Out Credits Affect the Affordability Determination? The general rule is that the amount of the opt-out credit must be added to the employee-share of the cheapest plan option providing minimum value that is used to determine affordability. Example: The employee-share of the premium for the employer’s cheapest plan option providing minimum value is $75/month for employee-only coverage. The plan offers a $25/month opt-out credit for employees who decline enrollment. Under the general rule, the plan costs $100/month ($75/month premium plus $25 opt-out credit) for purposes of the affordability rules to reflect the $25/month an employee forgoes when electing to enroll. To avoid the need to add the opt-out credit amount to the cost of the plan, the opt-out credit must meet the definition of an “eligible opt-out arrangement,” which requires: The opt-out credit is conditioned on the employee declining to enroll in the major medical plan; and The opt-out credit is conditioned on the employee providing reasonable evidence (including an employee attestation) annually that the employee and all members of the employee’s expected tax family have or will have minimum essential coverage under a group health plan during the period of coverage to which the opt-out credit applies. Note: In late 2016, the IRS indefinitely delayed these eligible opt-out arrangement rules for opt-out credits in place prior to December 16, 2015. Action Item: If you are adding an opt-out credit, make sure that you follow these eligible opt-out arrangement conditions to ensure that the opt-out credit does not affect whether your offer of coverage meets an affordability safe harbor.