Is there any way to avoid the risk-shifting and risk-distribution characteristics that must be contained in a health FSA?
A. Yes, but a health FSA will not qualify for tax-favored treatment if the effect of the reimbursement arrangement eliminates all, or substantially all, risk of loss to the employer maintaining the plan. (Reg. Sec. 1.125-2 Q&A-7) Q. If a participant elects $600 a year for their health FSA, pays the first $50 premium and incurs a $400 expense, must the Cafeteria Plan reimburse the participant for the entire $400 even though they have only paid $50? A. Yes. The maximum amount of reimbursement under a health FSA must be available at all times during the period of coverage. The maximum amount of reimbursement at a particular time -during the period of coverage cannot relate to the extent to which the participant has paid the premiums for the coverage. The payment schedule for the premiums may not be based on the rate or amount of covered claims incurred. Reimbursements must be paid at least monthly. (Reg. Sec. 1.125-2 Q&A-7) Q.
