Legal Alert: Recent Federal Compliance Updates for Health and Welfare Plans

Recent Federal Compliance Updates for Health and Welfare Plans

The federal agencies have recently released several pieces of guidance that are of interest to employers who sponsor group health plans and dependent care assistance programs (DCAPs). The following describes these recent updates in more detail.

1. Agency FAQs and Enforcement of Wellness Program Rewards

On August 26, 2026, the IRS, DOL, and HHS issued FAQs about the Affordable Care Act and Health Insurance Portability and Accountability Act Implementation Part 74 (FAQs) addressing enforcement of the reward rules for health-contingent wellness programs. 

Health-contingent wellness programs require a participant to satisfy a standard related to a health factor (e.g., not smoking or achieving certain biometric screening results) and can be further broken down into two subclasses – activity-only or outcome-based. Both subclasses require a reasonable alternative standard (or waiver), but the scope differs: activity-only programs must offer one to individuals for whom it is unreasonably difficult due to a medical condition, or medically inadvisable, to satisfy the standard, while outcome-based programs must offer one to anyone who does not meet the initial standard. Using the example above, anyone who is a tobacco user or who fails to achieve the required screening results must be provided a reasonable alternative to satisfying the standard, such as completing a tobacco cessation program or an alternative to obtaining the specified screening results.

Over time, the wellness program rules have been subject to multiple legal challenges, which has resulted in uncertainty regarding the applicability of certain requirements. One such area concerned whether plans were permitted to prorate a wellness program reward for individuals who satisfy a reasonable alternative standard mid-year, or whether the employer is required to pay the reward for the entire year even when it is not satisfied until later in the year. 

The FAQs address this question through enforcement relief: noting that the retroactivity language appears only in the preamble to the 2013 regulations and not in the regulatory text itself, the agencies state that, until further guidance or regulations are issued, they will not take enforcement action against a plan that provides the reward only prospectively, from the point at which a participant satisfies the reasonable alternative standard, as long as the participant was given the opportunity to satisfy the reasonable alternative standard at the beginning of the plan year. Thus, if the employer offers individuals the opportunity to meet the reasonable alternative standard at the start of the plan year, and they are given other opportunities during the plan year, the reward amount may be prorated based on when it is satisfied. Because the FAQs state the agencies’ enforcement position rather than amend the regulations, they do not bind courts, and the pending class actions challenging tobacco surcharges on this issue remain a litigation risk for plan sponsors.

In addition, the FAQs clarify that the reasonable alternative standard must be communicated in all written materials describing the terms of the health-contingent wellness program and, for outcome-based wellness programs, in any disclosure to an individual who did not satisfy an initial outcome-based standard. If there is mere mention of the program without a description of it, then the disclosure of the reasonable alternative standard is not required.

Employers must also ensure they are still meeting other wellness program requirements, such as ensuring the program: (1) is designed to promote health or prevent disease, (2) is designed such that the reward is available to all similarly situated individuals, including a reasonable alternative standard for those who cannot meet the initial standard, (3) gives eligible individuals the opportunity to qualify for the reward at least once per year, and (4) meets the wellness program limits (i.e.,  the total reward must not exceed 30% of the total cost for employee-only coverage under the plan (50% if the program is designed to prevent or reduce tobacco use)).

2. Guidance for MHPAEA NQTL Comparative Analyses 

On September 8, 2026, the DOL released Field Assistance Bulletin 2026-03 describing where it will focus MHPAEA NQTL enforcement until new rules are finalized. 

The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) prohibits a group health plan from applying financial requirements (e.g., deductibles, co-payments, coinsurance, and out-of-pocket maximums), quantitative treatment limitations (e.g., number of treatments, visits, or days of coverage), or non-quantitative treatment limitations (such as restrictions based on facility type) to its mental health and substance use disorder benefits that are more restrictive than those applied to the plan’s medical and surgical benefits. 

As a result of the Consolidated Appropriations Act, 2021 (CAA), beginning on February 10, 2021, group health plans were required to perform and document comparative analyses of the design and application of non-quantitative treatment limitations (NQTLs). 

In 2024, the DOL finalized regulations intended to implement the CAA, which, among other things, required plans and issuers to collect and evaluate data on the impact of NQTLs on access to mental health and substance use disorder benefits and to use that data in their comparative analyses. 

The final rules were quickly challenged in federal court. In May 2025, the federal agencies released a nonenforcement policy, indicating that they would not enforce the 2024 final rule until 18 months following a final decision in the legal challenge. The nonenforcement policy applies only to the portions of the final rule that were new relative to the 2013 regulations; plans must still comply with MHPAEA and maintain written NQTL comparative analyses. In March 2026, the agencies informed the court that they will not defend the 2024 final rule and intend to propose replacement regulations by the end of 2026.

In the Field Assistance Bulletin, the DOL’s Employee Benefits Security Administration (EBSA) clarifies that until new rules are finalized, enforcement will focus on three significant areas that it deems have the most potential to cause harm to participants and beneficiaries:

• Separate treatment limitations, including exclusions. Specifically, the focus will be on any blanket exclusions of treatments for covered mental health/substance use disorder (MH/SUD) conditions, where similar treatments are covered for medical/surgical conditions. For example, excluding residential treatment for MH/SUD conditions while covering intermediate levels of care, such as skilled nursing, home health, or rehabilitation programs, for medical/surgical conditions would raise a parity concern. The EBSA also noted it may investigate other NQTLs in response to participant complaints.
• Medical necessity standards and review process. Generally, this means the EBSA intends to focus on prior authorization, concurrent review, and retrospective review processes for MH/SUD conditions. Plans may apply these medical management standards to MH/SUD benefits, but the processes, strategies, evidentiary standards, and other factors used must be comparable to, and applied no more stringently than, those used for medical/surgical benefits. For example, if prior authorization is required for all or most MH/SUD treatments but only half of medical or surgical treatments, then that implies there is a parity issue. Further, the EBSA clarifies that all medical necessity standards used by the plan or carrier must be made available to the EBSA (upon request during NQTL investigations) and, upon request, to participants and beneficiaries. 
• Standards for determining network adequacy. The focus will be on network admission standards and provider reimbursement methodologies, with the goal of ensuring an adequate MH/SUD provider network that provides affordable access to care for participants. For example, if the processes or criteria required for providers to participate in the network are more burdensome for MH/SUD providers, or if it takes longer for claims to be approved for MH/SUD providers than for medical and surgical providers, that suggests there is a parity issue.

Alongside the Field Assistance Bulletin, the EBSA released an enforcement guidance document listing red flags that its investigators associate with potential MHPAEA problems. The document is a high-level checklist of plan terms and practices to look for, not a compliance methodology, and it does not change the substantive comparative analysis requirements. MHPAEA NQTL compliance remains extremely complex and plans (in particular, self-funded plans) should ensure they are working with experienced counsel or vendors when evaluating their NQTLs and developing their comparative analyses.

3. IRS Releases Proposed Regulations on Dependent Care Flexible Spending Account (DCFSA) Nondiscrimination Testing (NDT)

On August 11, 2026, the IRS released proposed regulations on NDT for dependent care assistance programs (DCAPs), including DCFSAs. This is the first time the IRS has released NDT guidance since Code Section 129 was enacted more than 45 years ago. While the regulations are in proposed form, employers may rely on them for 2026 plan year testing. The new regulations revise and improve the testing methodology for the DCFSA’s eligibility test and 55% average benefits test. 

As background, there are four tests for DCFSAs:

1. Contributions & Benefits: Terms must not favor highly compensated employees (HCEs) (for 2026 testing, generally more-than-5% owners and employees who earned more than $160,000 in 2025).
   1. Satisfied if benefits are offered on the same terms to all eligible employees.
2. Eligibility: Classification must be reasonable, based on objective business criteria, and nondiscriminatory under either a facts-and-circumstances test or a new numerical safe harbor.
3. Owner Concentration: No more than 25% of benefits may go to >5% shareholders/owners (including spouses and dependents).
4. Average Benefits: Non-HCE average benefits must be ≥ 55% of HCE average benefits.

Tests 1 and 3 are unchanged and are fairly straightforward to interpret. Test 2 – the eligibility test – is revised to add a numerical safe harbor test that should be run prior to the facts and circumstances portion. Under the safe harbor, the percentage of HCEs who are eligible is evaluated against the percentage of non-HCEs who are eligible. If the non-HCE eligibility percentage is at least 90% of the HCE eligibility percentage, the eligibility test is satisfied. If the ratio is below 90%, the 90% figure is reduced by 0.75% for every 1% that the non-HCE concentration exceeds 60%. For example, a 200-person workforce that is 80% non-HCE, with 75% of non-HCEs and 100% of HCEs eligible, has a 75% ratio against a 75% threshold (90% − 15% for each percentage point of non-HCE concentration over 60%), so it passes.

While this can be tricky for employers with a significant number of employees who aren’t eligible for the DCFSA, a plan that fails the safe harbor can still pass the eligibility test based on the facts and circumstances behind the classification. Employers may establish reasonable, bona fide employment-based classifications, such as full-time vs. part-time, exempt vs. non-exempt, or geographic location. 

The changes to test 4 – the 55% average benefits test – are the most timely. The One Big Beautiful Bill Act passed in July 2025 increased the amount that may be excluded from an employee’s taxable income for benefits paid under a DCFSA. For taxable years beginning after December 31, 2025, the excludable amount increases from $5,000 for unmarried employees and married employees filing a joint tax return ($2,500 for married employees filing separately) to $7,500 for unmarried employees and married employees filing a joint tax return ($3,750 for married employees filing separately). Without the proposed regulations, many employers would have difficulty passing the 55% average benefits test. 

The proposed regulations clarify that the 55% average benefits test counts only employees who actually receive DCFSA benefits during the year, rather than all non-excludable employees. This makes it much more likely that the plan will pass, as the traditional read of the law required the average to be determined based on all employees, not just those electing benefits under the plan. 

While it’s possible the final regulations may differ from what’s proposed, some employers have gotten comfortable determining the 55% test in prior years based on participating employees. Employers seeking to use the new methodology should consult with their FSA vendor and benefits counsel to ensure that it’s the right approach for them given the facts.

Next Steps for Employers

Although the wellness program rules remain in flux, employers with health-contingent wellness programs must continue to satisfy the program requirements and reward limits, including offering a reasonable alternative standard and, at a minimum, giving participants the opportunity to meet it at the beginning of each plan year. Under the FAQs, employers that provide the reward prospectively (rather than retroactively to the start of the plan year) when a participant satisfies the reasonable alternative standard mid-year will not face agency enforcement action, although employers should weigh the pending tobacco-surcharge litigation with counsel before relying on that relief. Employers should also confirm that all materials describing the wellness program, including the SPD and open enrollment materials, include the required reasonable alternative standard disclosure.

Further, employers who sponsor group medical plans subject to MHPAEA must still complete and document NQTL comparative analyses under the CAA and be prepared to produce them to the DOL or participants on request. As such:

• All employers subject to MHPAEA should review their plan documents and medical management practices against the three focus areas identified in the Field Assistance Bulletin, in particular any exclusions that apply only to MH/SUD conditions, prior authorization and other utilization review requirements, and provider network admission and reimbursement standards.
• Employers with fully insured plans should confirm their carrier is performing the NQTL comparative analyses. Employers with self-insured plans (other than small employers with 50 or fewer employees, which are exempt from MHPAEA) should ensure their third-party administrator (TPA) agreement requires the TPA either to complete the analyses or to provide the data necessary for another party to complete them, and to assist with DOL data requests in an audit.
• Employers who have any carved-out coverages subject to MHPAEA should confirm that the administrator of those benefits is completing, or assisting a qualified vendor in completing, the NQTL comparative analyses for those benefits. For example, if a self-funded medical plan has a separate prescription drug benefit administered by a pharmacy benefit manager (PBM), the employer should confirm that the PBM is performing or supporting the comparative analyses for the prescription drug benefits.

Employers who have adopted the higher DCFSA limit should ensure their cafeteria plans have been amended to reflect the new limit. All employers offering DCFSAs should confirm with their FSA administrators and benefits counsel whether to apply the new testing methodology for the 2026 plan year, and employers that have already failed or are projected to fail the 55% test should consider re-running it under the proposed regulations.