Employer Health Reform Issues Brief: Implementing and Communicating Changes to Health FSAs

Smart first steps for employers


The Provision

Health FSAs will be required to limit employee contributions to no more than $2,500 per year (subject to annual inflation adjustments). This is the first time a statutory cap has been imposed on Health FSA contributions, although caps are a fairly common feature of many employers’ Health FSAs. Additionally, Health FSAs will no longer be permitted to reimburse participants for over-the-counter drug purchases.

Effective Date: The ban on reimbursements for over-the-counter drugs is effective for plan years beginning after December 31, 2010. The $2,500 per year contribution limit is effective for plan years beginning after December 31, 2012.

Key Implication: Plan Design

A plan amendment will be required for any employer that currently offers a Health FSA with no annual contribution limit, or with a limit of more than $2,500. Some Health FSAs also may need amending to reflect the ban on reimbursing over-the-counter drug purchases.

Key Implication: Administration

Employers will need to update their administrative processes to ensure claims for over-the-counter drug purchases are not paid by the plan. This is particularly important for employers that give employees instant access to their Health FSAs through special debit cards. Employers using third-party administrators (TPAs) should confirm their TPA’s processes have been updated.

Key Implication: Communications

Employers should begin communicating these changes to employees as soon as possible so they can plan accordingly. The ban on using Health FSAs to pay for over-the-counter drugs likely will affect how much money employees are willing to put in a Health FSA, so they need to know about this change before making a salary reduction election during the upcoming open enrollment season. The $2,500 cap will not become effective until 2013, but telling employees about it now will give them a chance to plan the timing of large out-of-pocket medical expenditures.

Smart First Steps for Employers to Consider

Plan Design: Review the current Health FSA plan document to determine if an amendment will be needed to implement the ban on reimbursing over-the-counter drug purchases.

Administration: Confirm that TPAs are aware of and prepared to implement the over-the-counter drug ban. Employers that self-administer their Health FSAs should immediately begin to assess what changes to administrative processes will be required.

Communications: Develop a strategy for communicating the new rules regarding reimbursements to employees before the next open enrollment period begins. Explaining this change to employees now should help minimize confusion during open enrollment and give employees a chance to assess the impact of the change on their salary reduction election for next year. Consider using these pre-open enrollment communications to also announce the upcoming $2,500 cap so employees can begin planning for that as well.

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