CalNonprofits Insurance Services

Health Flexible Spending Accounts (FSA) and Federal COBRA

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Are you offering COBRA on your FSA when required?


October 4, 2017

You may already be comfortable with what benefits you make available for Federal COBRA (aka: continuation coverage) whenever one of your employees has a qualifying event such as termination of employment. But here’s something you may not have considered, if your organization offers a Flexible Spending Account (FSA) and you are subject to Federal COBRA (20 or more employees), continuation in the plan must be offered along with your other employee benefits. Since a health FSA reimburses qualified medical expenses, it is also considered a “group health plan”, just like your other major medical plans. If you haven’t been offering your FSA as an option when COBRA is triggered, it’s time you started!

NOTE: If your benefits are provided through some sort of multi-employer arrangement (e.g. a Trust), even if your organization has fewer than 20 employees, you may be covered by Federal COBRA rules (since all employees from all employers are counted).

Smaller organizations subject to Cal-COBRA (2 – 19 employees), do not have to offer FSAs since Cal-COBRA does not apply to any self-insured plans.

Unfortunately, the longer someone has an opportunity to participate in an FSA, the greater the risk to the employer of experiencing an overspent account. Consider this example:

Sam has elected to participate in your calendar-year health FSA with an annual limit of $1200 and signs up to have $100 per month paid by salary reduction. In February, Sam submits $100 worth of medical expenses. In March, Sam terminates his employment and elects to continue participation in the FSA via Federal COBRA. In April, Sam submits another $1100 worth of medical expenses (so he has now used the entire available annual amount), and then drops his Federal COBRA FSA coverage. The employer would have paid out $1200 in claims, but only collected $400 worth of premiums.

While this certainly wouldn’t happen with every employee, imagine how much the potential risk increases if you have to offer COBRA for the standard 18 – 36 months! Luckily, the IRS has set some conditions to greatly reduce your COBRA obligations regarding FSAs. If your FSA can meet some specific design tests, the following exceptions apply:

  1. If the qualified beneficiary has already “overspent” their account as of the date of the qualifying event – no COBRA needs to be offered.
  2. If the qualified beneficiary has “under-spent” their account – COBRA only needs to be offered until the end of the current plan year (including any grace period if you have adopted one).
A few more things
  • If your Federal COBRA duties are outsourced, be sure to notify your COBRA administrator if you offer a health FSA
  • If you administer Federal COBRA in-house, be sure you are offering continuation in your FSA
  • Dependent Care Assistance Programs (DCAPs) and Qualified Transportation Programs are not protected by COBRA, and no continuation needs to be offered
  • Employees who have overspent their account and wish to repay you, may only do so in one of two ways:
    1. by electing COBRA and paying the monthly premiums (e.g. no “lump sum” payments can be accepted after termination) or;
    2. you may design your cafeteria plan to allow a voluntary pre-tax deduction from their final paycheck to cover their COBRA premiums for the rest of the plan year
  • Since terminated employees can no longer make contributions through salary reduction, their premiums will be made on an “after-tax” basis (unless they are offered and voluntarily choose the pre-tax final paycheck deduction mentioned above)
  • If your FSA does not qualify for the special COBRA rule and you are required to offer COBRA for the standard 18 – 36 month period, don’t forget that the employee will have the same FSA open enrollment rights as any other active employee
  • Federal COBRA premiums for the FSA may include the standard 2% administration fee

For more information regarding FSAs and COBRA, contact your FSA administrator or CalNonprofits Insurance Account Manager.

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