Employer Funded FSA and HIPAA

[Guest ConceptCorner]

As many know from prior posts, I really like the concept of "Employer-Funded" FSA's as an offset for using higher deductibles and replacing dental and other upfront benefits. I have proposed this concept many times recently and employers are really responding in a positive way and the numbers really seem to make sense. I had a question for this board and hopefully someone will know the answer:

It was mentioned to me that FSA plans can be subject to HIPAA requirements if the employer puts more than $500 into everyones account. First question, is this a fact? Then, if so, with the exception of providing the Credible Coverage letter after the employee terminates, is there anything else I'm forgetting that would present a problem?

In the past few proposal examples we have been able to raise deductibles and eliminate many upfront coverages and come up with savings figures that are much more than $500 per employee that the employer can use to contribute to the employee's FSA accounts.

Every employer I've talked to recently about this idea likes the idea of getting the forfeitures back for unused FSA dollars. I've told them abou the new HRA but they like the old rules better. Thanks for any replys!

[papogi]

The health FSA is exempt from HIPAA if both of these are true:

1. The health FSA benefit does not exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. Assume, for example, an employee puts in $600, and the employer puts in $700. The employee is eligible for $1300, but only puts in $600 ($1300 is more than twice $600). This FSA, so far, is not exempt from HIPAA, and is subject to its rules. As another example, assume an employee puts in $100, and the employer puts in $600. The employee is eligible for $700, but only puts in $100 ($700 is more than $100 plus $500). Since such a large portion of the FSA is funded by the employer, the IRS sees this more like employer-provided insurance and is subject to HIPAA. As you know, most employers’ health care FSA’s are funded entirely by employees. These are exempt from HIPAA since the IRS does not see them as employer-provided insurance.

2. The employee has other group health plan coverage for the year available from his/her employer, and the other coverage is not limited to benefits that are HIPAA excepted benefits. If the only other available coverage has limited scope benefits (exempt from HIPAA), the health FSA would not be exempt from HIPAA.

So, the bottom line is that if an employer gives more than $500 to its employees for an FSA, then they just need to be sure to be offering a regular, comprehensive medical plan as well (which they are in what you are describing). The employees don't have to elect the medical coverage, it just has to be offered. Based on your information, these employer-funded FSA's will not be subject to HIPAA.

[Guest ConceptCorner]

Thanks Papogi, but I'm still unclear on one point. In all of these situations the employer has a group plan but wants to establish an employer-funded FSA with contributions that would probably be more than $500. I would also assume that there will be little, if any employee contributions. I think you said that both the $500 rule and the group plan rule must exist to not be subject to HIPAA?

Also, if the plan would be subject to HIPAA, is it really that big a deal? What are the drawbacks if it were to be subject to HIPAA?

Thanks

[papogi]

Yes, both rules must apply for the FSA to not be subject to HIPAA. Again, as long as they offer a regular, comprehensive medical plan, they should be fine.

If an FSA is subject to HIPAA, you would have to create creditable coverage certificates for terminating individuals. The creditable coverage cerificate would be useless anyway, since employers are not required to take FSA creditable coverage certificates and use them to reduce pre-ex exclusion periods. So why produce the certificate for non-exempt FSA's? You have to, but at the same time, there's no purpose to it.

[Mary C]

There are also COBRA obligations imposed on FSAs that differ depending on whether they are HIPAA excepted or not.

[papogi]

Good point.

If you determine that the health FSA is exempt from HIPAA, there are two special exemptions from COBRA:

1. COBRA need not be offered after the plan year in which the termination occurs. This applies if the amount paid in would exceed the benefit. The 2% administrative fee guarantees this.

2. COBRA need not be offered at all if the employee has already been reimbursed an amount equal to or greater than the amount actually paid into the account.

If the health FSA is exempt from HIPAA, and item 2 above does not apply, then flex COBRA will need to be offered for the remainder of the current plan year. All qualified beneficiaries can elect a health FSA.

If you determine that the health FSA is not exempt from HIPAA, COBRA will need to be offered under the usual COBRA rules (18, 29 or 36 months). All qualified beneficiaries can elect a health FSA.

[Guest ConceptCorner]

So, it looks like the key is to keeping it clean is to set the employer contribution at $500 or lower. I guess the employer could also do more than $500 if they did it by way of a match?

[papogi]

The employer can go over $500 no problem as long as they also offer a comprehensive medical plan (not limited scope). I am taking it that you are pushing high-deductible plans along with employer-funded FSA's. The high-deductible plan is subject to HIPAA, so in those cases those employers are fine going over $500. The real key is to be sure that the employers are offering regular medical coverage which is subject to HIPAA. Again, it only needs to be offered. Employees don't have to elect it.

[Guest ConceptCorner]

Yes, in every example we are showing high deductible plans and dropping some of the benefits such as dental/vision. It ususally frees up a lot of dollars that the employer can use to make a contribution. Of the ten-plus plans we have shown, the most extreme example frees up about $3200 per employee. The had a very rich plan and the employer was paying 65% of both the employee and dependent coverages. We showed a $2500 deductible and dropped the office copay and dental. He thinks the idea is fantastic. With the FSA we are using a debit card, so the employee has easy access. However, I got concerned about how HIPAA and/or COBRA might effect this situation. It appears that it may not be a problem to really worry about.

[papogi]

You're fine. You are proposing medical plans subject to HIPAA and FSA's which are not subject to HIPAA because of the fact that at least one comprehensive medical plan is being offered to employees. Your FSA's are not subject to HIPAA. You will have no HIPAA cert responsibility to the FSA. You will have a flex COBRA responsibility only for the plan year in which the termination occurs, and only for those employees who terminate and have not been reimbursed an amount equal to or greater than what the employee has contributed to the account.