Stephanie Raborn, JD
McGriff Employee Benefits Compliance Team
If your company offers a health flexible spending account (FSA) funded by employees, you may have seen that these FSAs usually have to pay Patient-Centered Outcomes Research Institute (PCORI) fees—unless they qualify as an excepted benefit. So, what does it mean for a benefit to be “excepted,” and why does that status matter to you?
What are excepted benefits?
Excepted benefits are defined by federal regulations, including HIPAA and the Affordable Care Act.¹ These benefits don’t have to follow certain ACA rules that apply to traditional group health plans. Common examples include dental, vision, flexible spending accounts, disability coverage, and employee assistance programs (EAPs).
Knowing whether your plan is an excepted benefit is important because it means the plan doesn’t have to follow some complex rules. For example, excepted benefits are not subject to ACA lifetime and annual dollar limits, the ACA preventive services requirement, PCORI fees, HIPAA portability rules, or the Mental Health Parity and Addiction Equity Act (MHPAEA). They also avoid newer rules like the prescription drug and health care reporting requirements from the Consolidated Appropriations Act of 2021 and the anti-gag clause rules.¹ ²
Categories of excepted benefits
The Department of Labor and Treasury identify four main categories of excepted benefits.² Some categories require meeting specific conditions to qualify as excepted benefits.³ These categories are:
- Benefits that are not health coverage, such as auto, workers’ compensation, and liability insurance⁴
- Limited-scope excepted benefits⁵
- Non-coordinated excepted benefits, including coverage for a specific disease or hospital indemnity insurance⁶ ⁷
- Supplemental excepted benefits⁸ ⁹
Limited-scope excepted benefits
Limited-scope benefits, such as dental and vision, must be offered under separate policies to qualify.⁴ They can be part of the same plan as other benefits, a separate plan, or the only plan offered, as long as participants can decline coverage or claims are handled separately.
Non-coordinated excepted benefits
Fixed indemnity and specified disease coverage must be provided under separate contracts and pay fixed amounts regardless of actual costs, per recent federal rules.⁶ ⁷ For example, a hospital indemnity plan might pay a fixed daily amount regardless of the total hospital bill.
A final rule published in April 2024 confirmed these requirements and removed a planned consumer notice requirement for group health plans. While some regulatory proposals were not adopted, future updates may revisit these topics.⁷
Supplemental excepted benefits
Supplemental coverage must fill gaps in primary insurance and meet cost and design criteria outlined by federal agencies.⁸ ⁹ This coverage must be insured (not self-insured) and focus on benefits that are not essential health benefits in the state where it’s offered.
A safe harbor established by federal agencies in 2007 outlines four criteria for supplemental coverage to be excepted:
- It must be issued by an entity that does not provide the primary coverage under the plan.¹⁰
- It must be designed specifically to fill gaps in primary coverage, not just act as secondary coverage.¹¹
- Its cost cannot exceed 15% of the cost of the primary coverage (calculated like COBRA premiums).¹²
- It cannot discriminate among participants based on health factors.¹³
Employee assistance programs (EAPs)
Standalone EAPs may qualify as excepted benefits if they meet criteria set by federal regulations, including limits on medical care and cost-sharing.¹⁴ If an EAP provides medical care or is tied to a medical plan, it is considered a group health plan and not excepted.
To qualify, an EAP must meet these four conditions:
- It cannot provide significant medical care benefits¹⁵
- It cannot coordinate benefits with another group health plan¹⁶
- Participation cannot require premiums or contributions
- There can be no cost-sharing for participants
“Significant medical care” isn’t clearly defined, but examples help clarify. For instance, short-term outpatient counseling for substance use disorders without prior authorization is not considered significant medical care. On the other hand, disease management services like lab tests or prescription drugs for chronic conditions would be.
Health flexible spending accounts (FSAs)
Health FSAs must meet the Maximum Benefit and Availability Conditions defined by IRS and Treasury regulations to qualify as excepted benefits.¹³ ¹⁴
Maximum benefit condition: The maximum benefit payable can’t exceed either twice the employee’s salary reduction election or the employee’s election plus $500. This means the employer can contribute up to $500 or match the employee’s contribution up to a certain limit that changes annually.
Availability condition: Other group health plan coverage (major medical) must be available to those eligible for the FSA during the year. Employees don’t have to enroll in both, but they must be eligible for both.
Most health FSAs meet these criteria, but the rules can be complex. Vendors familiar with these requirements can help ensure your FSA qualifies as an excepted benefit.
This information is provided for general educational purposes only and should not be considered legal or tax advice. Please consult your legal counsel or tax advisor for advice specific to your situation.
References
¹Code §§ 9831(b) and (c); ERISA §§ 732(b) and (c); PHSA §2722.
²Treasury Regulations §§ 54.9831-1(b) and (c); DOL Reg. §§ 2590.732(c)(3)(v)(A) and (B); HHS Reg. §§ 146.145(b)(3)(v)(A) and (B).
³Code § 9831(c)(1); ERISA § 732(c)(1); PHSA § 2722(c)(1); PHSA § 2791(c)(2).
⁴Treasury Regulations §54.9831-1(c)(3)(ii)(A); DOL Reg. § 2590.732(c)(3)(ii)(A); HHS Reg. § 146.145(b)(3)(ii)(A).
⁵Code §§ 9831(c)(2) and 9832(c)(3); ERISA §§ 732(c)(2) and 733(c)(3); PHSA § 2791(c)(3); Treasury Regulations § 54.9831-1(c)(4); DOL Reg. § 2590.732(c)(4); HHS Reg. § 146.145(b)(4).
⁶See Treasury Regulations § 54.9831-1(c)(4)(iii), DOL Reg. § 2590.732(c)(4)(iii), and HHS Reg. § 146.145(b)(4)(iii).
⁷Short-Term, Limited-Duration Insurance and Independent, Noncoordinated Excepted Benefits Coverage, 26 CFR Part 54, 29 CFR Part 2590, 45 CFR Parts 144, 146 and 148, 89 Fed. Reg. 23338 (Apr. 3, 2024).
⁸Treasury Regulations § 54.9831(c)(5); DOL Reg. § 2590.732(c)(5); HHS Reg. § 146.145(b)(5).
⁹Treasury Regulations § 54.9831-1(c)(5); DOL Reg. § 2590.732(c)(5); HHSReg. § 146.145(b)(5).
¹⁰Excepted Benefits; Lifetime and Annual Limits; and Short-Term, Limited-Duration Insurance, 26 CFR Part 54; 29 CFR Part 2590; 45 CFR Parts 144-148; 81 Fed. Reg. 75316, 75319 (Oct. 31, 2016).
¹¹DOL Field Assistance Bulletin 207-4 (Dec. 7, 2007); CMS Program Memorandum, Transmittal No. 08-01 (May 2008); IRS Notice 2008-23.
¹²Amendments to Excepted Benefits, 26 CFR Part 54, 29 CFR Part 2590, 45 CFR Part 146, 79 Fed. Reg. 59130, 59123 (Oct. 12, 2014).
¹³Code § 106(c)(2) defines flexible spending arrangements as benefit programs which provide employees with coverage under which “(A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and reasonable conditions), and (B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage.”
¹⁴Treasury Regulations §§ 54.9831-1(b) and (c); DOL Reg. §§ 2509.732(c)(3)(v)(A) and (B); HHS Reg. §§ 146.145(b)(3)(v)(A) and (B).
¹⁵Treasury Regulations § 54.9831-1(c)(3)(v)(B); DOL Reg. § 2590.732(c)(3)(v)(B); HHS Reg. §146.145(b)(3)(v)(B).
¹⁶Treasury Regulations § 54.9831-1(c)(3)(v)(A); DOL Reg. § 2590.732(c)(3)(v)(A); HHS Reg. § 146.145(b)(3)(v)(A).
