Medical Flexible Spending Account - Can Employer Promise to Pay Contribution to Medical FSA if Employee Selects Certain Medical Insurance Option

[Guest rocnrols2]

Company X maintains a cafeteria plan for its employees. Company X is proposing a design change in which it promises to make a $300 contribution to the medical FSA it offers if the employee elects a specified medical insurance option, whether or not the employee also elects to make contributions to its medical FSA. Is there any legal prohibition against an employer providing one type of benefit contingent upon an employee's election of a specified benefit?

[SLuskin]

Let's see if this is the scenario. Employer X offers 2 group medical plans. One is an HMO with very low copays and very little out of pocket expense for the employees, but with high premiums. The employer pays 80% of the premiums. This same employer wants to introduce an HSA compatible plan, but does not want to establish an HSA for many reasons. So, the employer pays 100% of this premium for the employees and also adds $300/year to the FSA of the participants in this plan, but not to those who elected the HMO. The premium for the high deductible plan plus the $300 FSA contribution is still less per employee than the 80% of the HMO premium. As long as the document permits, and as long as the employee communication pieces are clear, this seems not only ok, but the wave of the future.

[GBurns]

Will this "specified medical insurance option" be a HDHP that is HSA eligible?

The OP stated that the $300 would go to an FSA not to an HSA. and the OP also did not say that the "option" would qualify as an HDHP.

It could be that the employer just wants to direct attention to this "option" just because it is not as rich or not as expensive as the current choices which for whatever reason have to be kept.

[g8r]

I agree with SLuskin's conclusion that this is O.K. (and it's irrelevant to the question as to why the employer wants to do this).

There are 2 issues.

1) Is this even subject to the cafeteria plan rules? The answer is no -- at least with respect to the employer contributions. Why -- b/c there's no cash option. Of course there is a need for the cafe plan due to employee contributions.

2) Is this discriminatory? IRC 105(h) nondiscrimination is based on eligiblity, not utilization. Thus, as long as the option is available to a nondiscriminatory group, then I don't see a problem.

It's not clear how 125 testing (the 25% concentration test) is applied. The issue is whether the employer contributions (subsidies in this case) are pulled into the 25% concentration test even though these contributions aren't part of a cafeteria plan (per 1. above). The IRS has informally said that employer subsidies for health insurance are included (e.g., if the employer pays 80% of a premium w/no cash opt-out, some think the 80% is in the test b/c the employee pays the other 20% through the cafe plan). The theory is that you either have full coverage or no coverage --so the 20% from the employee results in full coverage and therefore 100% of the premium is the benefit obtained through the cafeteria plan. But, it's not clear whether the same would apply to the FSA. Since the benefit varies based on the contribution, one could argue that the $300 employer contribution is not part of the cafeteria plan and is not counted in running the 25% concentration test b/c the participant could still obtain FSA coverage w/out the employer contribution. Personally, I wouldn't include the $300 in the concentration test.

[Guest rocnrols2]

In response to the responses to my initial questions, (1) this medical option is not intended to be an HDHP (although the employer does offer one) and (2) the offering of this option will likely not result in discrimination because every employee has the option to select this or one of the other health options, including an HDHP and a POS or an HMO.