Can an Employer Offer an FSA Without a Health Plan?

Employers often provide various benefits to help employees manage healthcare and dependent care costs. Flexible Spending Accounts (FSAs) are a common offering designed to allow individuals to set aside pre-tax money for eligible expenses. A frequent question arises regarding whether an employer can offer an FSA to employees without also providing a traditional health plan. This question is particularly relevant for health-related FSAs due to specific regulatory requirements.

Understanding Flexible Spending Accounts

Flexible Spending Accounts are employer-sponsored benefit accounts that allow employees to contribute a portion of their pre-tax salary to cover specific out-of-pocket expenses. This pre-tax treatment means contributions are not subject to federal income tax, Social Security, or Medicare taxes, which can lead to significant tax savings. There are several types of FSAs, each designed for different categories of expenses.

A Health FSA is designated for qualified medical, dental, and vision expenses not covered by insurance. These can include deductibles, co-payments, prescription medications, and even certain over-the-counter items. Another common type is the Dependent Care FSA, which helps cover eligible dependent care costs, such as childcare for children under age 13 or care for a spouse or dependent who is physically or mentally incapable of self-care, enabling the employee to work.

A Limited Purpose FSA is a specialized type of Health FSA that typically covers only dental and vision expenses. This account is often offered in conjunction with a High-Deductible Health Plan (HDHP) and a Health Savings Account (HSA). The purpose of a Limited Purpose FSA is to allow individuals to use pre-tax funds for immediate dental and vision needs while preserving their HSA funds for future medical expenses or retirement.

ACA’s Role in Health FSA Offerings

Offering a standalone Health FSA without a traditional health plan is complex due to the Affordable Care Act (ACA). Under the ACA, Health FSAs are generally considered group health plans and are subject to various market reform provisions.

These provisions include the prohibition on annual dollar limits for essential health benefits and the requirement to provide certain preventive services without cost-sharing. If a Health FSA is offered without being properly structured, it could be deemed a standalone group health plan, requiring compliance with all ACA market reforms.

A Health FSA that fails to meet these requirements faces significant penalties, potentially amounting to $100 per day per employee under Internal Revenue Code Section 4980D. The ACA provides an exception for certain benefits, known as “excepted benefits,” which are exempt from most market reform provisions.

Meeting Excepted Benefit Requirements for Health FSAs

For a Health FSA to be offered by an employer without triggering the full scope of ACA market reform requirements, it must qualify as an “excepted benefit.” One primary condition for a Health FSA to be an excepted benefit is that the employer must also make other group health plan coverage, not limited to excepted benefits, available to the employees for the year.

Furthermore, employees eligible for the Health FSA must also be eligible for the employer’s major medical plan. This is sometimes referred to as the “footprint rule,” meaning the Health FSA’s eligibility criteria cannot be broader than those of the employer’s primary health plan. Employees do not need to enroll in the major medical plan, but they must have the option to do so.

Regarding contributions, the maximum benefit payable under the Health FSA cannot exceed two times the employee’s salary reduction election for the year, or, if greater, the amount of the employee’s salary reduction election plus $500. For example, if an employee elects to contribute $1,000, the total maximum benefit, including any employer contributions, generally cannot exceed $2,000. If the employee elects $0, the employer contribution limit is $500. While employee salary reduction contributions have an annual limit (e.g., $3,300 for plan years beginning in 2025), nonelective employer contributions typically do not count towards this specific limit but are factored into the “maximum benefit payable” test for excepted benefit status. An employer contribution that exceeds these thresholds could cause the Health FSA to lose its excepted benefit status, leading to non-compliance with ACA market reforms.

Dependent Care and Other FSA Considerations

Dependent Care FSAs (DCFSAs) operate under different regulatory considerations compared to Health FSAs. DCFSAs are generally not subject to the ACA’s market reform provisions. This distinction means an employer can typically offer a DCFSA without also providing a traditional group health plan.

DCFSAs allow employees to use pre-tax funds for eligible dependent care expenses, such as daycare, preschool, or summer day camp, enabling the employee to work. The annual contribution limit for a DCFSA is set by the Internal Revenue Service at $5,000 per household for single filers or married couples filing jointly, or $2,500 for married individuals filing separately. These funds offer a valuable tax advantage for families managing care costs.

Limited Purpose FSAs (LPFSAs) are also distinct from general Health FSAs in their design and regulatory treatment. LPFSAs are specifically designed to be compatible with High-Deductible Health Plans (HDHPs) and Health Savings Accounts (HSAs). They typically restrict eligible expenses to dental and vision care. This specialized focus allows individuals enrolled in an HDHP with an HSA to use pre-tax funds for routine dental and vision costs without jeopardizing their HSA eligibility. Therefore, LPFSAs are not considered “standalone” in the same problematic sense as a general Health FSA might be, as they are intended to complement a specific type of health coverage arrangement.