Watch for These Health Care Reform Penalty Traps

September 28, 2015|James Derzon

If you’re an employer that sponsors a health reimbursement arrangement (HRA) or health flexible spending arrangement (FSA), you’ll want to avoid these two types of huge potential penalties.

Specifically, there is a $100/day per employee penalty for violating certain market reforms under the Affordable Care Act. There is also a new $250 penalty for each failure to follow new required employer reporting for 2015 (see our article Required Employer Reporting for 2015 on Schenck’s website for details). Total reporting penalties will be limited to $3 million for a calendar year.

What’s the difference between an HRA and an FSA?

An HRA is an arrangement funded solely by an employer that reimburses employees for medical expenses incurred by the employee, his spouse, dependents and any children under age 27 at the end of a taxable year.

Under an HRA, there is a maximum dollar amount for a coverage period, and any unused portion is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

An FSA is simply an arrangement in which specified incurred expenses may be reimbursed. An FSA may be offered inside or outside of a cafeteria plan, and has no carry forward requirement.

How does the $100/day penalty apply to HRAs and FSAs?

Under the Affordable Care Act, there are no annual limits on the dollar amount of benefits for any individual (with certain exceptions, such as limited scope dental or vision benefits).

Accordingly, under IRS guidance effective for plan years beginning in 2014:

  • Stand–alone HRAs and stand–alone FSAs offered outside of a cafeteria plan can no longer impose any dollar limits without incurring penalties.
  • HRAs will be able to continue imposing dollar limits if they are integrated with an employer’s group health plan. Please contact us if you have any questions about the integration of your HRA with your group health plan.
  • FSAs offered outside of a cafeteria plan will be able to continue imposing dollar limits if:
    • you offer group health plan coverage (other than the FSA) to FSA participants that is not limited to excepted benefits (like vision and dental only), and
    • the maximum benefit payable to any health FSA participant can’t exceed the greater of:
      • twice the amount of the participant’s after-tax salary contribution for the year (if any), or
      • $500 plus the amount of the participant’s after-tax salary contribution election.
  • FSAs offered inside of a cafeteria plan may impose a $2,550 limit for salary reduction contributions, subject to cost-of–living increases.

However, to be exempt from all other market reforms (other than the dollar limitation prohibition) and penalties, two other requirements must be met:

  1. you must offer group health plan coverage (other than the cafeteria plan FSA) to FSA participants that is not limited to excepted benefits (such as dental and vision), and
  2. the maximum benefit payable to any participant in the cafeteria plan’s health FSA can’t exceed the greater of: 
    1. twice the participant’s salary reduction election for the year, or
    2. $500 plus the amount of the participant’s salary reduction elections.

In other words, the $100/day per employee penalty will not apply if there are no employer contributions in the cafeteria plan’s health FSA, salary reduction contribution are limited to no more than $2,550 for 2015, and general purpose health plan coverage is made available to your FSA participants.

What’s the employer reporting penalty trap for employers with HRAs and FSAs?

Since stand–alone HRAs and FSAs that impose benefit limitations are no longer permitted without incurring substantial penalties, HRAs and FSAs should now be available to your employees only as a supplement to your group health plan, whether it be insured or self-insured.

Plan sponsors of supplemental health coverage GENERALLY have no Form 1095-B or 1095-C reporting requirement for that supplemental plan with respect to employees covered by both the major and supplemental plans. However, you will have a reporting requirement for your HRA or FSA under other circumstances.

For example, if an individual is eligible for your HRA or FSA because he or she enrolled in your insured health plan, no information reporting will be required on new Forms 1095-B or 1095-C with respect to your HRA or FSA for that employee.

Under other circumstances, presumably where participation in your HRA or FSA is independent of insured health plan participation, reporting will be required. For example, if you have an employee participating in an HRA or FSA who is NOT a participant in your group health plan (whether it be insured or self-insured), coverage under the HRA or FSA must be reported for that employee.

So the trap is that even though your HRA or FSA is supplemental to your overall group health plan, you might still have a reporting requirement for some employees – and if you miss it, you could be subject to the $250 per failure penalty.

If your HRA or FSA is supplemental to a self-insured health plan, no employer reporting would be required with respect to your HRA or FSA as long as the required reporting is made for the self-insured health plan. Reporting would be required, however, for any employees in the HRA or FSA not enrolled in the self-insured health plan.

In the event that you have to file an information return for your HRA or FSA, large employers will use Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, while small employers will use Form 1095-B, Health Coverage.

Contact Jim Derzon at 800-236-2246 to learn more.


Jim Derzon, CPA, is an employee benefits specialist for our firm on technical matters pertaining to retirement plans and employee benefits. Jim works in these areas with our clients, large and small. He has extensive experience in both industry and public accounting.