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Cafeteria Plan Changes

While the focus of the Affordable Care Act is clearly on the nation’s health insurance system, the Act does include several rifle-shot changes to the Tax Code’s cafeteria plan rules. These include the following (listed in the order they become effective):

RESTRICTIONS ON REIMBURSEMENTS UNDER FSAs, HSAs AND HRAs

Effective in 2011, expenses for non-prescription medications may be reimbursed from health flexible spending accounts (“FSAs”), health savings accounts (“HSAs”), and health reimbursement arrangements (“HRAs”) only if those medications are prescribed by a physician. (Insulin will still be reimbursable without a prescription.)

SAFE-HARBOR NONDISCRIMINATION RULE FOR “SIMPLE CAFETERIA PLANS”   

The Act creates a nondiscrimination safe harbor for “simple cafeteria plans.” To be eligible to sponsor such a plan, an employer must have employed an average of 100 or fewer employees for each of the past two years. (This limit may be exceeded by a “growing employer,” up to a limit of 200 employees.) If such an employer makes a minimum matching or non-elective contribution on behalf of each eligible employee, the plan will be treated as satisfying the nondiscrimination rules otherwise applicable to cafeteria plans. It will also be deemed to satisfy the nondiscrimination rules applicable to certain benefits offered under the plan, including the rules that apply to group-term life insurance, self-insured medical coverage, and dependent care assistance. This option will be available as of January 1, 2011. 

INCREASED TAXES ON NONQUALIFIED HSA DISTRIBUTIONS 

Effective for distributions made on or after January 1, 2011, the tax on distributions from HSAs for anything other than qualified medical expenses will increase from 10% to 20%. The tax on such nonqualified distributions from Archer medical savings accounts will increase from 15% to 20%. 

LIMIT ON FSA CONTRIBUTIONS 

Effective in 2013, annual salary-deferral contributions to health FSAs will be limited to $2,500. Starting in 2014, this amount will be adjusted for inflation. (Note that this cap will apparently not apply to true employer FSA contributions, such as “flex credits” or “flex dollars” that are not made available to employees in cash.) 

QUALIFIED HEALTH PLANS OFFERED THROUGH EXCHANGES 

Finally, the Act creates statewide clearinghouses (known as “exchanges”) for “qualified health plans.” A qualified health plan offered through an exchange will generally not be a permissible pre-tax benefit under a cafeteria plan. There is an exception to this rule, however, for small employers that offer their employees the opportunity to enroll in a qualified health plan through an exchange. This rule becomes effective as of January 1, 2014, when the exchanges are scheduled to come online.