What Are Excepted Benefits and How Do They Work?

Excepted benefits are a class of health-related coverage outside the framework of traditional medical insurance. These benefits are exempt from many federal rules that govern major medical plans, including those from the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA). Their purpose is not to provide comprehensive medical care but to offer additional financial protection for specific health-related services. Because they are not subject to the same mandates, they do not include features like coverage for preventive services or prohibitions on annual dollar limits.

The Four Categories of Excepted Benefits

Federal regulations organize excepted benefits into four distinct categories, each with specific criteria that a plan must meet to qualify for this status. This classification system helps distinguish between different types of supplemental and non-medical coverage.

Non-Health Coverage

This category includes benefits not considered health coverage, even if they provide medical payments as an incidental part of their primary purpose. These policies are not designed to cover medical care in the way a health insurance plan does. Examples include automobile medical payment insurance, workers’ compensation, and liability insurance.

Limited Excepted Benefits

This category encompasses benefits that are limited in scope and must be offered under a separate policy from a major medical plan. Common examples are standalone dental and vision plans. For a dental or vision plan to qualify, it must be a distinct policy; if these benefits are integrated directly into a comprehensive health plan, they are not considered excepted. Certain health flexible spending arrangements (FSAs) can also fall into this category if they meet specific requirements.

Noncoordinated Benefits

Benefits in this category are defined by their payment structure and are often called fixed-indemnity insurance. These plans pay a fixed dollar amount to the policyholder for a specific event or period, without regard to the actual medical expenses incurred. Examples include hospital indemnity insurance that might pay $200 per day of a hospital stay or a critical illness policy that pays a lump sum upon diagnosis of a covered condition.

Supplemental Benefits

The final category consists of coverage specifically designed to supplement other forms of primary health coverage. This includes plans that supplement Medicare, known as Medigap policies, or those that supplement military healthcare coverage like TRICARE.

Relationship to Major Medical Health Insurance

Excepted benefits are fundamentally different from major medical health insurance and are not a substitute for it. The primary distinction is that excepted benefits do not qualify as Minimum Essential Coverage (MEC) under the Affordable Care Act. While the federal penalty for individuals who fail to maintain MEC no longer exists, it remains the standard that larger employers must offer to avoid potential penalties. Some states have also implemented their own individual coverage mandates with penalties.

Because they are not MEC, enrolling in only excepted benefit plans does not satisfy ACA requirements. For example, an employer providing only a standalone dental plan and a hospital indemnity policy to its workforce would not be considered to be offering qualifying health coverage under the employer mandate. This structure reinforces their role as supplemental, intended to work alongside a comprehensive plan.

These plans can pay benefits directly to the policyholder, which can be used for any purpose, including non-medical expenses. This is unlike major medical insurance, which typically pays providers directly for covered services. This structure illustrates their function as a financial tool rather than a comprehensive healthcare solution.

How Excepted Benefits Affect HSA Eligibility

An individual’s ability to contribute to a Health Savings Account (HSA) is governed by strict rules, and holding certain types of other health coverage can be disqualifying. To be eligible to contribute to an HSA, a person must be enrolled in a High Deductible Health Plan (HDHP) and cannot have any other health coverage, with a few specific exceptions. Excepted benefits play a unique role, as some types are permissible while others can prevent HSA contributions.

Coverage that does not interfere with HSA eligibility is often referred to as “permitted coverage” or “permitted insurance” in IRS guidance. This includes limited-scope dental and vision plans, as well as insurance related to accidents, disability, and long-term care. An individual can be covered by these policies and still contribute to their HSA.

Conversely, certain other benefits can render an individual ineligible for HSA contributions. A primary example is a general-purpose Health FSA, which reimburses a wide range of medical expenses. If an employee is covered by a general-purpose FSA that can pay for medical costs before the HDHP deductible is met, they are disqualified from contributing to an HSA. To avoid this conflict, an FSA must be a limited-purpose FSA, restricted to dental and vision expenses, or a post-deductible FSA, which only reimburses after the statutory HDHP deductible has been satisfied. An Excepted Benefit HRA (EBHRA) that reimburses medical expenses before the HDHP deductible is met can also be disqualifying coverage.