QUESTION: How does COBRA apply to health flexible spending accounts (FSAs)?
ANSWER: Generally, a health FSA is considered an ERISA-covered health plan, and, unless an exception applies, an employer subject to COBRA provisions must offer COBRA continuation coverage to qualified beneficiaries who experience a loss in coverage due to a qualifying event for up to 18 months, including new elections during open enrollment.
A limited COBRA option must be offered if the FSA plan is considered an excepted benefit. To determine whether an FSA is an excepted benefit, the following conditions must be met:
- The annual FSA election amount does not exceed two times the amount contributed by the employee. If the employer does not contribute to the FSA, this requirement is met.
- A health insurance plan was available to the FSA participant due to his or her employment, and this coverage was not limited to excepted benefits such as limited-scope dental and vision coverage.
- The maximum COBRA premium is equal to or exceeds the maximum FSA benefit.
For an excepted-benefit FSA, COBRA is only offered for the remainder of the plan year and not for a full 18 months (i.e., it is limited). COBRA coverage does not need to be offered to qualified beneficiaries who have “overspent” their accounts at the time of the qualifying event.
If the health FSA plan is not an excepted benefit, the employer will need to offer COBRA regardless of whether the account is over- or underspent and the COBRA duration is offered for the full 18 months.
Employees who elect COBRA continuation coverage may only make after-tax contributions to the FSA account once they are no longer receiving a paycheck. In addition, employers may require a qualified beneficiary to pay an additional 2% administrative fee. As an example, an employee who makes an annual FSA election of $2,400 and terminates employment on June 30 will have contributed $1,200 ($200/month) at the time of termination. For each month of continued coverage, the beneficiary should send $204 (102% of the applicable premium/contribution) to the employer.
If an employee does not elect COBRA upon termination, he or she cannot access the FSA funds once terminated (except for claims incurred prior to termination date), and any balances are forfeited. For more information and details, search Zywave for “COBRA Rules: Health FSAs and HRAs”.