Compensation or contribution limits for FSAs or HRAs

[billfgrady]

We represent a C corporation that has two highly-compensated employees, both of whom are shareholders. We are considering setting up either a Flexible Spending Account or a Health Reimbursement Arrangement. Given the ability to roll unused funds from one plan year to the next (and the freedom from the prohibitions of Section 125), I'm inclined to go with an HRA. I am not aware, however, whether there are any limits in terms of compensation or contribution/reimbursement amounts that we will need to take into account, under Sections 105, 105 or elsewhere. Can anyone shed light on this?

[Guest tintree73]

Everyone correct me if I am wrong, but it was my understanding HRA contributions must be solely employer-paid and that there is no statutory limit to the amount of contributions that may be made (any limits are made by plan design - and how much the employer is willing to contribute). However, According to Notice 2002-45, HRAs must limit reimbursements to medical care expenses (as defined by section 213(d) of the Internal Revenue Code) incurred by the employee and the employee’s spouse and dependents.

http://benefitslink.com/IRS/notice2002-45.pdf

[billfgrady]

That sounds about right for HRAs. What about FSAs? I think that contribution limits are also plan, as opposed to statute, driven.

[Guest b2kates]

Suggest you look at IRC Section 105(h) for discrimination impact on "self-funded" program.

[Alf]

There is no statutory limit on contributions to health FSAs.

[Mary C]

What about the medical savings accounts in the new Medicare Act? They accept employee or employer money and can be rolled over each year.

[g8r]

I presume you're referring to an FSA as one offered through a cafeteria plan. Otherwise, it would just be a self-funded health plan funded by the employer and the only limit would be that the limit be nondiscriminatory (but there is no statutory or regulatory limit).

When offered through a cafeteria plan via salary reduction, once again there is no stautory or regulatory limit. However, due to the nondiscrimination requirement, I've always wondered whether there is a problem where an HCE earns more than an NHCE. If there is no limit on their contribution, the HCE can obtain a larger benefit than the NHCE. Someone earning $100,000 could put in slightly under $100,000 and anyone earning less can't get that same benefit.

So, I've always considered the limit to be something lower than the lowest paid participant. That would avoid the above argument. It doesn't mean it's right, but I know you can't go wrong with that approach.

[billfgrady]

Can HRAs be created outside of a cafeteria plan setting? My understanding is that they MUST be stand-alone because there can be no connection with salary deferral.

[g8r]

You are correct. An HRA can't be offered through a cafeteria plan.