Where’s the FSA in COBRA?
Karla Sanders, our Director of Client Benefits, explained that “There is a misconception that FSA balances are forfeited at the time of termination of employment and thus employees are not given the opportunity to elect COBRA continuation of their FSA plan.”
COBRA compliance can be difficult to administer in the simplest of circumstances and when you add FSA requirements to COBRA administration the potential for noncompliance increases.
Know your FSA COBRA obligations:
The first step is to determine if your FSA plan is an excepted benefit. If the FSA plan does not meet all of the excepted benefit criteria, COBRA must be offered for a full 18 months.
FSA plans are an excepted benefit if it meets all of the following conditions:
a) The Maximum Benefit Condition: the annual FSA election amount does not exceed 2 times the amount contributed by the employee. If the employer does not contribute to the FSA this requirement is met.
b) The Availability Condition: a health insurance plan was available to the FSA participant due to employment. This requirement is usually met if the employer has the same eligibility for the group health plan and the FSA plan and if enrollment in major medical plan is available each year.
c) The Premium Condition: the maximum COBRA premium equals or exceeds the maximum FSA benefit available for the plan year in which the qualifying event occurred. If the employer does not contribute to the FSA this requirement is met.
If the plan is an excepted benefit as determined above then:
a) COBRA is only offered for the remainder of the plan year (not 18 months)
b) COBRA is only offered if the account is underspent. An account is underspent if the FSA balance (annual election less claims) at time of termination is more than the required COBRA premiums.
Let’s do the math:
An employee makes an annual election of $2,400 ($200 per month) and terminates on October 31st. The employee has contributed $2000 to his/her FSA account and submitted claims of $1500. The account is underspent because the remaining annual limit of $900 ($2400 less $1500) is more than the maximum premium of $400 ($200 x 2 month) than can be charged the remaining of the year
*Employees don’t have to use COBRA for health coverage in order to use it for their flexible spending accounts.
What if an employee wishes to repay the overspent amount?
Occasionally upon termination an employee wishes to repay the overspent amount (and most employers would cheer at this!), however the employer should not accept the additional contributions, even if they are made voluntarily. Such a practice is a violation of the uniform coverage rule.
When are balances forfeited?
Upon termination employees can only access FSA funds for claims incurred prior to the termination date. If the employee does not elect COBRA then any balances are forfeited.
Note that any grace period that applies to health FSA participants will also apply to FSA COBRA participants at the end of a plan year.
Do not leave these compliance issues to just anyone. Our COBRA Compliance Experts can help ensure you are not alone in dealing with these issues.
Filed under: COBRA, Flexible Spending Accounts
