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Does COBRA apply to pretax dollars that an employee sets
aside for medical expenses in a flexible spending account
(FSA)?
Yes, health FSAs generally qualify as employer-sponsored group health plans subject to the continuation
coverage requirements of the Consolidated Omnibus Budget Reconciliation Act (COBRA), although
certain conditions might limit the duration of COBRA or eliminate it entirely. Even if COBRA does not
apply, the regulations governing health FSAs generally require a 12-month coverage period unless a
participant revokes coverage or stops paying premiums. So, as long as employees separating from
service make full premium payments, they can continue their health FSAs for the rest of the 12-month
period, regardless of COBRA. Nonetheless, departing employees often revoke FSA coverage since posttermination FSA payments cannot be made on a pretax basis through salary reduction agreements,
which eliminates the primary tax break associated with maintaining an FSA.
While most health FSAs qualify as group health plans subject to COBRA, under certain conditions, an
employer might not have to offer COBRA at all, or it can limit COBRA duration to the current plan year.
For these COBRA limits to apply, a health FSA must meet two conditions:
• Under the first condition, benefits provided under the health FSA must qualify as excepted benefits
under the Health Insurance Portability and Accountability Act. HIPAA-excepted health FSA benefits must
be offered through a separate plan or policy that is not coordinated with the employer's other health
benefit plan. The U.S. Department of Labor also specifies that to qualify for the HIPAA exception, a health
FSA's maximum reimbursement cannot exceed two times the employee's salary reduction election or, if
greater, the employee's salary reduction election plus $500.
• Under the second condition, the maximum payment that the health FSA can require for 12 months of
COBRA continuation coverage must equal or exceed the maximum benefit available under the health
FSA for the year in when the qualifying event occurs.
If both conditions are met, an employer can limit the duration of COBRA coverage to the current plan year
rather than extend it for the 18 months typically allowed after terminations. In addition, once both
conditions are met, an employer does not have to offer COBRA coverage for the remainder of the current
health FSA plan year unless, on the date of the qualifying event, the qualified beneficiary still can receive
benefits that exceed the applicable COBRA premiums for the balance of the plan year. In other words,
COBRA does not apply if already-reimbursed health FSA claims plus COBRA premiums for the
remainder of the year equal or exceed the employee's annual FSA election.
Example: An employer maintains a major medical plan and a separate health FSA, both of which operate
on a calendar year basis and are subject to COBRA. Under the health FSA, each employee can elect to
have up to $1,200 of annual compensation contributed to the FSA, and the employer matches these
elections. Since the maximum amount available under the health FSA for the year is two times an
employee's annual salary reduction, the first condition is satisfied. The employer also has determined that
the cost of providing coverage for similarly situated non-COBRA beneficiaries under this health FSA is
equal to two times their annual salary reduction election. Therefore, the maximum COBRA premium is
two times an employee's salary reduction plus two percent, or 2.04 times the employee's salary reduction.
Since the maximum benefit available under the health FSA (2.0 times salary reduction election) is less
than the maximum COBRA premium for the year (2.04 times the salary reduction election), the second
condition is met. So COBRA does not have to offered beyond the current plan year.
Using the same example, the plan also might not have to offer COBRA for the remainder of the current
plan year, depending on an employee's date of termination, claims history, and level of contributions. For
example, an employee who elected the maximum salary election of $1,200 could receive a maximum
annual benefit of $2,400 from the health FSA. If this employee submits $300 in reimbursable health FSA
claims and then terminates employment on May 31, the maximum remaining benefit for the year is
$2,100. The most that the health FSA can require to be paid for COBRA continuation coverage for the
rest of the year is $1,428—that is, the applicable annual premium (102 percent of $2,400, or 2.04 times
the salary election), divided into monthly premiums ($204), then multiplied by the seven months
remaining in the year. In this case, the health FSA must offer COBRA continuation coverage for the rest
of the year since COBRA premiums for that period ($1,428) are less than the maximum benefits ($2,100)
that the employee could receive during that time. However, if the employee had submitted $1,000 in
reimbursable FSA claims before termination, COBRA would not apply since the remaining benefits
($1,400) would be less than COBRA premiums ($1,428) for the same period.
COBRA issues for health FSAs. Even when COBRA clearly applies to health FSAs, administering
COBRA coverage can prove tricky, particularly in situations where a beneficiary becomes entitled to
COBRA due to divorce or an employee's death. For example, the Internal Revenue Service has not
issued guidance on the extent to which a divorced spouse is entitled to an employee's prepaid health FSA
benefits and how to calculate COBRA premiums in such situations. Likewise, while COBRA requires
allowing each qualified beneficiary an independent right to elect COBRA coverage, no clear guidelines
have been issued on how to allocate prepaid health FSA benefits among beneficiaries who become
entitled to COBRA coverage after an employee's death. In these situations, employers should consult a
tax and benefits expert to determine the best way to proceed.
(BNA; 12/08)
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