How the HSA Plan effects Section 125 Cafeteria Plans

Health Savings Accounts coupled with a High Deductible Health Insurance policy are the latest trend in healthcare.

So how do HSA plans affect your Section 125 Cafeteria Plan, and what do you need to know when bringing Health Savings Accounts into your Section 125 Plan? Good question, and as succinctly as possible, there are two issues you need to understand:

  • The savings portion, or the part going to the financial institution can also be ran through the Section 125 Premium Only Plan, however your Plan Document will need to be amended.

  • HSA plans drastically limit what a Health FSA can reimburse. The IRS requires that HSA participants only be able to participate in what are known as "Limited Purpose Health FSA" plans and/or a "Post Deductible Health FSA" plan. The Health FSA can't pay for expenses that could be paid by the HSA bank account. Health FSA plan documents will need to be amended to address these two new FSA options.

    • How Section 125 Cafeteria Plans with HSA Modules help Employees and Employers

    Allowing employees to pretax their HSA savings gives them a way to save-as-they-go for city, state, federal, Social Security and Medicare taxes on these withholdings. This substantially increases their take-home pay. Employers also save as they reduce their matching Social Security and Medicare taxes, sometimes Federal and State unemployment taxes, and they may also be eligible for worker's compensation savings in some states.

    HSA Plans and Section 125 Irrevocable Deduction Issues

    One big difference between the HSA deduction and regular Cafeteria Plan deductions is HSA deductions do not come under the standard Section 125 irrevocable deduction rules. Deductions established during open enrollment under standard Section 125 Cafeteria Plans can not be changed during the plan year, meaning they are irrevocable, unless a qualifying event occurs such as birth, marriage, divorce, etc. HSA savings deductions can be changed by the employee up to twelve times a year subject to their maximum allowed contribution. The Plan Document and Summary Plan Description must be amended and restated to address this issue.

    HSA Plans and Limited Purpose Health FSAs

    The Health FSA is affected by an HSA plan in that your FSA can't reimburse the same expenses as your HSA. For employees who participate in both the HSA and the Health FSA, they will participate in what is known as a "Limited Purpose Health FSA" or a "post deductible Health FSA Plan".

    What expenses can a Limited Purpose Health FSA reimburse? Basically only dental, vision and preventive care expenses not covered by the HSA policy can be reimbursed from the Health FSA.

    What expenses can a Post-Deductible FSA reimburse? The Health FSA can't reimburse expenses until after the HSA high deductible has been met under the health plan.

    The IRS has advised employers to amend their Health FSA plans to be HSA compatible. Employers offering an HSA option must modify their Section 125 Cafeteria Plan to automatically convert the general purpose Health FSA option to a limited purpose or post deductible, or a combination limited purpose and post deductible Health FSA for HSA participants.