2
B. Employer Payment Plans
Revenue Ruling 61-146 holds that if an employer reimburses an employee’s
substantiated premiums for non-employer sponsored hospital and medical insurance,
the payments are excluded from the employee’s gross income under Code § 106. This
exclusion also applies if the employer pays the premiums directly to the insurance
company. An employer payment plan, as the term is used in this notice, does not
include an employer-sponsored arrangement under which an employee may choose
either cash or an after-tax amount to be applied toward health coverage. Individual
employers may establish payroll practices of forwarding post-tax employee wages to a
health insurance issuer at the direction of an employee without establishing a group
health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.
C. Health Flexible Spending Arrangements (Health FSAs)
In general, a health FSA is a benefit designed to reimburse employees for
medical care expenses (as defined in Code § 213(d), other than premiums) incurred by
the employee, or the employee’s spouse, dependents, and any children who, as of the
end of the taxable year, have not attained age 27. See Employee Benefits—Cafeteria
Plans, 72 Fed. Reg. 43938, 43957 (August 6, 2007) (proposed regulations; to be
codified, in part, once final, at 26 C.F.R. §1.125-5); Code §§ 105(b) and 106(f).
Contributions to a health FSA offered through a cafeteria plan satisfying the
requirements of Code § 125 (a Code § 125 plan) do not result in gross income to the
employee. Code § 125(a). While employees electing coverage under a health FSA
typically also elect to enter into a salary reduction agreement, employers may provide
additional health FSA benefits in excess of the salary reduction amount. See Employee
Benefits—Cafeteria Plans, 72 Fed. Reg. 43938, 43955-43957 (August 6, 2007)
(proposed regulations; to be codified, in part, once final, at 26 C.F.R. §§1.125-1(r),
1.125-5(b)). For plan years beginning after December 31, 2012, the amount of the
salary reduction is limited by Code § 125(i) to $2,500 (indexed annually for plan years
beginning after December 31, 2013). See IRS Notice 2012-40, 2012-26 IRB 1046, for
more information about the application of the limitation. Additional employer
contributions are not limited by Code § 125(i).
The Code, ERISA, and the PHS Act impose various requirements on group
health plans, but certain of these requirements do not apply to a group health plan in
relation to its provision of excepted benefits. Code § 9831(b), ERISA § 732(b), PHS Act
§§ 2722(b) and 2763. Although a health FSA is a group health plan within the meaning
of Code § 9832(a), ERISA § 733(a), and PHS Act § 2791(a),
a health FSA may be
considered to provide only excepted benefits if other group health plan coverage not
limited to excepted benefits is made available for the year to employees by the
employer, but only if the arrangement is structured so that the maximum benefit payable
to any participant cannot exceed two times the participant’s salary reduction election for
the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the
participant’s salary reduction election). 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R.
§2590.732(c)(3)(v), and 45 C.F.R. §146.145(c)(3)(v).