Excepted Benefits

As employers look for ways to enhance their benefits offerings without increasing the cost of major medical coverage, vendors have introduced an expanding array of supplemental health benefits, many of which are marketed as “excepted benefits.” However, employers should carefully evaluate whether a benefit satisfies an established excepted benefit category before assuming it is exempt from the rules applicable to group health plans.

Even when a benefit qualifies as an excepted benefit, employers should not assume it is free from all compliance obligations. Although excepted benefits are generally exempt from HIPAA portability requirements and many Affordable Care Act (ACA) market reforms, they are typically subject to ERISA and, in some cases, COBRA.

This article provides a high-level overview of the types of benefits that generally qualify as excepted benefits and the key compliance considerations associated with offering them.

Which Benefits Are Excepted Benefits?

Important: While vendors increasingly market innovative health benefits as excepted benefits, agency guidance has not recognized every supplemental health arrangement as qualifying for excepted benefit status. For example, stand-alone telehealth programs and direct primary care (DPC) arrangements are not currently recognized as excepted benefits. Employers should carefully evaluate whether a benefit satisfies an existing excepted benefit category rather than relying solely on a vendor’s characterization.

Certain coverage qualifies for excepted benefit status without any conditions, including the following:

• coverage only for accidents (including accidental death and dismemberment coverage);
• disability-income coverage;
• liability insurance (e.g., general liability and auto liability insurance);
• coverage issued as a supplement to liability insurance;
• workers’ compensation or similar coverage;
• automobile medical payment insurance;
• credit-only insurance; and
• on-site medical clinics.

Excepted benefit health reimbursement arrangements (EBHRAs), which became an option back in 2020, are also always excepted benefits.

Limited-Scope Dental and Vision

Dental and vision benefits are excepted benefits if they are limited in scope to coverage for treatment of the eyes or mouth and are either:

1. provided under a separate policy, certificate, or contract of insurance; OR
2. otherwise not an integral part of a group health plan.

Only fully-insured plans may qualify under the first test (provided under a separate policy, certificate, or contract of insurance). Fully-insured and self-funded plans may both qualify under the second test.

For employers to meet the second test, participants must be able to decline coverage OR the claims for the benefits must be administered under a contract separate from claims administration for any other benefits under the plan.

Fixed Indemnity and Specified Disease Policies

Fixed indemnity coverage and specified disease policies, which typically provide a flat dollar amount per day or occurrence, are excepted benefits if the following requirements are met:

• the coverage is provided under a separate policy, certificate, or contract of insurance;
• no coordination exists between such benefits and any exclusion under another plan maintained by the same employer; and
• benefits are paid regardless of whether benefits are also provided under any group health plan maintained by the same plan sponsor.

Employee Assistance Programs

To qualify as excepted benefits, employee assistance programs (EAPs) must meet four criteria:

1. The program cannot provide significant benefits in the nature of medical care. For this purpose, the amount, scope, and duration of covered services are taken into account. Examples given in guidance:

• Benefits are not significant when the EAP provides only limited, short-term outpatient counseling for substance use disorder services (without covering inpatient, residential, partial residential, or intensive outpatient care) without requiring prior authorization or review for medical necessity.
• Benefits are significant when the EAP provides disease management services (such as laboratory testing, counseling, and prescription drugs) for individuals with chronic conditions such as diabetes.

2. The EAP cannot be coordinated with benefits under another group health plan.

• Participants must not be required to use and exhaust benefits under the EAP (making the EAP a “gatekeeper”) before an individual is eligible for benefits under the other group health plan; and
• Participant eligibility for benefits under the EAP must not be dependent on participation in another group health plan.

3. Employees cannot be required to make a contribution to participate in the EAP.

4. There can be no participant cost sharing (such as a co-pay) under the EAP.

Health FSA

To qualify as an excepted benefit, a health FSA must meet two conditions:

• Maximum Benefit Condition. The maximum benefit payable under the health FSA to any participant cannot exceed the greater of: (i) 2x the participant’s salary reduction election; or (ii) the amount of the participant’s salary reduction election plus $500. In other words, the employer can contribute up to $500 or a match of the employee’s contribution, whichever is greater.
• Availability Condition. Other non-excepted group health plan coverage (e.g., major medical coverage) must be made available for the year to those eligible to participate in the health FSA. Individuals must be eligible for both a group medical plan and a health FSA, but they do not have to be enrolled in both.

Fertility Benefits

Important: The fertility benefit rules discussed below are proposed regulations and are not currently effective. Employers should not rely on these rules until final regulations are issued.

In early 2026, a proposed rule indicates that fertility benefits meeting certain requirements could qualify as excepted benefits.

• the fertility coverage must either be insured or otherwise “not an integral part” of the employer’s group health plan;
• substantially all covered services must relate to the diagnosis, mitigation, or treatment of infertility or infertility-related reproductive health conditions and generally be provided by licensed medical professionals (abortion and related services are explicitly excluded);
• the benefit must be subject to a $120,000 lifetime maximum (indexed for medical inflation); and
• plans must provide a written notice describing the fertility coverage, limitations, provider access, and claims procedures.

If finalized, the rules would apply for plan years beginning on or after January 1, 2027.

Why Does Excepted Benefit Status Matter?

Excepted benefit status reduces administrative compliance burdens because excepted benefits are exempt from HIPAA portability rules and the Affordable Care Act (ACA) market reform requirements.

HIPAA Portability Rules

Normally under HIPAA portability rules, group health plans are required to allow mid-year enrollment in accordance with HIPAA special enrollment rights, cannot impose enrollment or coverage restrictions based on pre-existing conditions, and cannot discriminate based on health status. These rules do not apply to excepted benefits.

NOTE: HIPAA privacy and security rules are separate and apply broadly to all health plans. Excepted benefits are not automatically exempt and have to be examined separately to determine whether HIPAA’s privacy and security rules regarding the handling of protected health information (PHI) apply.

ACA Market Reforms

The ACA, among other things, requires plans to cover all preventive services with no cost-sharing, imposes waiting period limitations (generally 90 calendar days or less), prohibits annual or lifetime dollar limits and imposes annual out-of-pocket maximums on essential benefits, and requires coverage for dependent children to age 26. Group health plans not meeting all such requirements must be integrated with a compliant group medical plan (cannot be stand-alone). However, excepted benefits avoid these requirements and can therefore be offered on a stand-alone basis. In addition, most excepted benefits are not subject to PCORI fees.

Compliance Requirements for Excepted Benefits

Employers should not mistake an “excepted benefit” for a “compliance-free benefit.” ERISA and COBRA often apply to excepted benefits.

In general, most benefits offered by employers, including excepted benefits, are subject to ERISA, especially if they provide any level of coverage for medical treatment or services. When a group health plan is subject to ERISA, in addition to complying with ERISA fiduciary duties and proper handling of plan assets and claims and appeals, the plan must have a plan document, distribute a summary plan description (SPD), and file a Form 5500 annually (e.g., generally if there are 100 or more participants).

Federal COBRA applies for group health plans sponsored by employers with 20 or more employees. For this purpose, group health plans include any arrangement that provides significant medical benefits. For example, EAPs that provide medical benefits beyond general referrals are subject to COBRA. Additionally, an onsite clinic that goes beyond first aid will generally be subject to COBRA. Plans subject to COBRA must offer continuation of coverage for plan participants who lose coverage tied to a qualifying event and must also provide various notices in connection with COBRA continuation rights.

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