Employer Contribution--Limiting Covered Expenses

[KJohnson]

Employer wants to increase the deductible in its group health plan from $500 to $1,000. The employer, however, wants to provide employees with an additional $500 non-elective contribution in their FSA but designate that this employer contribuiton can only be used for medical expenses that are included in the deductible after an employee satisifes the first $500 of the deductible. The FSA will remain the same for employee contributions--it can be used for any Section 213 expenses.

The 125 Plan TPA is saying that this cannot be done within a single FSA. Does anyone know of a reason an FSA could not be structured this way.

(We considered a HRA, but it seems silly to have 2 plans rather than one especially if the employer is not going to allow a carry over from year to year of the employer contribution Also, you don't get the limited scope COBRA rule for the HRA)

[Guest llerner]

I don't believe that an FSA can stipulate that benefits can only be used after the deductible is satisfied. The HRA can have a rollover feature but that is not mandatory. Also, both HRA and FSA have the same COBRA rules if the plan year last only one year and no carryover feature is included.

The higher deductible plans are practically tailor made for FSAs and one compelling reason the IRS permitted them is for the exact situation, you describe....escalating premiums resulting in very high deductibles.

HRAs are less expensive than FSA because you can self-administer out of general funds and don't need a trust account set up.

[KJohnson]

1) Do you have any cites that you cannot limit an FSA in this fashion ?

2) I think that your statement regarding the same COBRA rules being applicable to FSA's and HRA's is a little to broad. To have the limited COBRA FSA rule the maximum benefit under a FSA cannot exceed the larger of:

(i) Two times the employee’s salary reduction election; or

(ii) The amount of the employee’s salary reduction for the year plus $500.

Since you cannot have employee salary reductions into an HRA, then it would appear that any HRA that offers more than a $500 benefit could not satisfy the rules regarding limited COBRA coverage for FSAs. (This would probably include most HRAs). However, in my situation I guess you could argue that a stand alone HRA with only a $500 employer contribuiton would satisfy the rule.

3) I don't understand your comment about having to set up a trust account for FSA's. DOL has a published non-enforcment policy regarding any trust requirement.

[SLuskin]

I think you can absolutely have an employer-funded fsa that limits what those funds can be used for and when they will be available. We have any number of employer-funded plans that stipulate prescription drugs only, dental only, vision only, hospital inpatient copay only. Certainly you could have a $500 employer funded fsa which covers the second $500 of the employee deductible.

[Lisa Hand]

The plan sponsor has the flexiblity to define their plan and its benefits as long as they are not trying to make the definitions less restrictive than federal code. Making it more restrictive is fine, it just needs to be clearly defined in the plan document, SPD and edcuational materials. For example, some plan sponsors do not permit all of the allowed change of status events, which is perfectly acceptable. They can not, on the other hand, permit changes that are clearly defined as not permited under the regulations.