Does anyone know what "benefit" means under section 105(h) of the Internal Revenue Code, as it applies to health care FSAs? More specifically, does that section require that a plan has to be offered to at least 80 percent of those eligible to participate if at least 70 percent of all employees are eligible, or does it say that at least 80 percent of those eligible to participate under a plan must participate if at least 70 percent of all employees are eligible?

We have always taken "benefit" to mean eligible to elect. If it meant actually participate, very few companies would have an FSA.
I have seen employers who interpret benefit as actually participate seed everyone's account with a nominal amount, thus achieving 100% participation for the eligibles.

It states that the plan must cover either (i) 70% of "all employees" or (ii) 80% of all eligible employees, provided that at least 70% of "all employees" are eligible. It is clearer in Regs. 1.105-11©(2)(i).

There is an alternative test (the "classification test") if the plan doesn't meet this requirement.

"All employees" may exclude those: (i) below a minimum age (of up to age 25); (ii) with insufficient service (up to 3 years of service may be required); (iii) part-time employees working less than 35 hours per year; (iv) those employees with collectively-bargained benefits; (v) non-resident aliens with no US income.

S Luskin, I would like to think that your interpretation is correct, but I am not sure it tracks the statutory langauge. If "benefitting" means eligible to benefit then the second test under (i) makes no sense. I know that the EBIA manual says that benefitting means actually benefitting not just being eligible to elect the benefit.


A self-insured medical reimbursement plan does not satisfy
the requirements of subparagraph (A) of paragraph (2) unless
such plan benefits--
(i) 70 percent or more of all employees, or 80 percent
or more of all the employees who are eligible to benefit
under the plan if 70 percent or more of all employees are
eligible to benefit under the plan; or
(ii) such employees as qualify under a classification
set up by the employer and found by the Secretary not to be
discriminatory in favor of highly compensated individuals

I agree that very few plans pass either test in (i), but if you go down to (ii) and look at the mechanics of the reasonable classification test you have a much better chance of passing.