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.

About the Author

  • Founded in 1984 as a subsidiary of the California Association of Nonprofits (CalNonprofits), CalNonprofits Insurance Services was established during a time of diminishing insurance options for nonprofits. One of the driving reasons for establishing the association was to use the collective influence of the sector to secure more stable and quality insurance. We have developed, and are known for, our wide spectrum of services reflecting expertise in both the insurance and nonprofit sectors, our superior customer service, and our development of exclusive insurance products, including a highly successful dental and vision trust. We insure more than 1,200 nonprofit organizations throughout California and we are the only California brokerage specializing in insurance for nonprofits. Our clients range from newly established nonprofits all the way to venerable organizations with multiple locations statewide.

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