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This document addresses the application of certain portability provisions
added by the Health Insurance Portability and Accountability Act of 1996,
Public Law 104-191 (HIPAA), to flexible spending arrangements (FSAs). The
Departments of the Treasury, Labor, and Health and Human Services (the
Departments) have concluded that it is appropriate to treat benefits under
certain health FSAs as excepted benefits under sections 9831 and 9832(c) of
the Internal Revenue Code of 1986 (Code), sections 732 and 733(c) of the
Employee Retirement Income Security Act of 1974 (ERISA), and sections 2721
and 2791(c) of the Public Health Service Act (PHS Act).
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HIPAA Group Market Portability Provisions. HIPAA provides measures to
improve portability and continuity with respect to group health plan
coverage provided in connection with employment. These provisions include
limitations on preexisting condition exclusions, rules prohibiting
discrimination on the basis of any health status-related factor, and rules
requiring special enrollment. These provisions are generally effective for
group health plans and group health insurance coverage for plan years
beginning on or after July 1, 1997. The Departments of the Treasury, Labor,
and Health and Human Services (the Departments) issued regulations
implementing these group market provisions at 26 CFR 54.9801-1T through
54.9801-6T, 54.9802-1T, 54.9831-1T (formerly 54.9804-1T), 54.9833-1T
(formerly 54.9806- 1T); 29 CFR part 2590; and 45 CFR parts 144 and 146 (made
available to the public on April 1, 1997 and published in the Federal
Register on April 8, 1997, 62 FR 16893).
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The HIPAA portability provisions in section 9801 of the Internal Revenue
Code of 1986 (Code), section 701 of the Employee Retirement Income Security
Act of 1974 (ERISA), and section 2701 of the Public Health Service Act (PHS
Act), and the implementing regulations impose limits on the maximum
preexisting condition exclusion period that may be imposed by a group health
plan or a group health insurance issuer. In general, neither a group health
plan nor a group health insurance issuer may impose more than a 12-month
preexisting condition exclusion for individuals enrolling in the plan or
coverage, although a plan or issuer can impose an 18-month preexisting
condition exclusion for late enrollees. In either case, the exclusion period
must be reduced by the amount of an individual's prior "creditable
coverage." Plans and issuers subject to the HIPAA requirements
generally must also issue certificates of creditable coverage for an
individual to use as proof of creditable coverage for subsequent coverage.
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In general, these group market portability provisions apply to group health
plans (generally plans sponsored by employers or employee organizations, or
both) and health insurance issuers providing coverage under a group health
plan, effective for plan years beginning after June 30, 1997, except that
the obligation to provide certain information relating to creditable
coverage became effective as early as June 1, 1997. However, the group
market portability provisions do not apply to certain excepted benefits. For
example, the group market portability provisions do not apply to certain
types of supplemental coverage provided under a separate policy,
certificate, or contract of insurance. In general, if benefits under a plan
or coverage are excepted benefits, then plans and issuers do not have to
provide certificates for the coverage, and the coverage may not qualify as
creditable coverage.
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Health Flexible Spending Arrangements. Under proposed Treasury Regulations,
a health FSA generally is a benefit program that provides employees with
coverage under which specified, incurred expenses may be reimbursed (subject
to reimbursement maximums and any other reasonable conditions) and under
which the maximum amount of reimbursement that is reasonably available to a
participant for a period of coverage is not substantially in excess of the
total premium (including both employee-paid and employer-paid portions of
the premium) for the participant's coverage. Coverage and reimbursements
provided to an individual under a group health plan that is a health FSA and
that conforms to the generally applicable rules for accident or health plans
qualify for the same tax-favored treatment that generally is extended to
coverage and reimbursements under employer-provided accident or health
plans.(1) Health FSA reimbursements typically provide coverage for
medical care expenses not otherwise covered by the employer's primary group
health plan.
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A health FSA is permitted to operate under a cafeteria plan described in
section 125 of the Code. Pursuant to the rules of section 125, an employee
can elect to reduce the employee's salary in order to pay for health FSA
coverage without the employee having to include that portion of the salary
in gross income. Commonly, the maximum benefit payable under a health FSA
for any year is equal to the amount of the employee's salary reduction
election for the year, plus any additional employer contribution for the
year.
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This document clarifies the conditions under which it is appropriate to
treat benefits under a health FSA as excepted benefits. Specifically,
benefits under a health FSA are excepted benefits if the maximum benefit
payable for the employee under the health FSA for the year does not exceed
two times the employee's salary reduction election under the health FSA for
the year (or, if greater, the amount of the employee's salary reduction
election under the health FSA for the year, plus $500), the employee has
other coverage available under a group health plan of the employer for the
year, and the other coverage is not limited to benefits that are excepted
benefits.
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The effect of treating benefits under a health FSA as excepted benefits is
that the health FSA is not subject to the group market portability
provisions. Accordingly, there would be no requirement under section 9801 of
the Code, section 701 of ERISA, or section 2701 of the PHS Act and the
implementing regulations to issue a certificate of creditable coverage for
such a health FSA. In addition, coverage that consists solely of coverage
under such a health FSA does not constitute creditable coverage.
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Group health plans, issuers, and other entities subject to the group market
portability provisions of HIPAA may rely on this document in treating
benefits under health FSAs described in the first paragraph of this section
III as excepted benefits.
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See Q&A-7, prop. Treas. Reg.,
proposed 26 CFR 1.125-2 (54 FR 9460, 9502, March 7, 1989).
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