Can an employer set different fsa healthcare account annual election amount limits?

[Guest kjhgwh]

Sorry, I have to ask the question and verify. Can an employer set different flexible spending account (healthcare) limits based on years of service or position? This is discriminatory and would disqualify the plan, correct?

[401 Chaos]

It's certainly troublesome and would beg significant discrimination testing issues; however, I suppose some such provisions might pass. For example, if you allowed higher limits for those with more service and the employer happened to have a high number of NHCEs with lots of years of service, it might pass. I suspect, however, that you'll tell me that all the HCEs have a lot of years and only some NHCEs do. Doing it by position strikes me as even tougher to pass but again it might depend on the actual makeup of the group. Overall I suspect you would have real problems and would just be creating an enormous headache even if it would work.

[Guest JKG]

If the plan were found to be discriminatory, it would not necessarily be disqualified. The penalty for failure is that highly compensated employees or key employees or highly compensated individuals, depending on the test, would have to include certain amounts in income (i.e., they lose the pre-tax or tax-free status of certain benefits).

In addition to Section 125 testing under the cafeteria plan in general, of greater concern might be testing under 105(h), because the FSA is considered a self-insured health plan.

[g8r]

Varying it based on position is probably discriminatory. And, varying it based on service is definitely discriminatory. The following is from 1.105-11 which applies to the health FSA because it is a self-funded heath plan:

A plan may establish a maximum limit for the amount of

reimbursement which may be paid a participant for any single benefit, or

combination of benefits. However, any maximum limit attributable to

employer contributions must be uniform for all participants and for all

dependents of employees who are participants and may not be modified by

reason of a participant's age or years of service.