Exploring FSA options for small employers

Q         As a small employer, can we offer employees a flexible spending account (FSA) if we don’t offer a medical plan?

A   Unfortunately, you cannot. In fact, no employer can offer an FSA without offering a medical plan. The Affordable Care Act (ACA) sets forth various market reforms that affect group health plans. Because FSAs are considered group health plans, they are subject to such market reforms—unless they qualify as “excepted benefits.” Excepted benefit plans are exempt from market reforms and provide limited health coverage. Plans of this type include dental insurance, vision insurance, and certain FSAs.

To qualify as an excepted benefit, an FSA must satisfy certain requirements, one of which is that other medical plan coverage (not limited in scope to excepted benefits) is offered to all FSA participants. Whether your employees actually enroll in the group health plan doesn’t matter. It’s enough if they are simply eligible for enrollment. If this availability requirement isn’t met, then an FSA isn’t an excepted benefit and is subject to the ACA market reforms.

One such reform mandates that group health plans cover preventive services (e.g., blood pressure tests, cancer screenings, routine vaccinations) without any cost-sharing. Because FSAs, by nature, don’t cover preventive services without cost-sharing, they don’t satisfy this reform on their own. Thus, to offer an FSA, you must offer it in conjunction with another group health plan so it complies with the ACA. Otherwise, you would be subject to daily penalties for violation of the market reforms under the ACA.