When it comes to COBRA, we all understand it applies to the major medical health plan. But frequently, plan sponsors overlook the impact of COBRA on flexible spending accounts. Yes, COBRA does apply to FSAs so let's look at how.
In most cases, employers must offer COBRA of a flexible spending account. The first thing to determine is whether your FSA plan is an "excepted" benefit. If your FSA is an excepted benefit, it must offer a limited COBRA option. The factors for determining whether your FSA is an excepted benefit are:
- The annual FSA election amount cannot exceed 2 times the amount contributed by the employee. If the employer DOES NOT fund the FSA, this requirement is met.
- Was a health insurance plan was available to the FSA participant due to his/her employment? The answer here is likely yes if the employer has a medical plan and the FSA and medical plan have the same eligibility guidelines.
- The maximum COBRA premium equals or exceeds the maximum FSA benefit. Before adding numbers, be aware that this requirement is met if the employee is the sole contributor to the FSA
So if you have determined that your FSA is an "excepted" benefit, what type of COBRA do you have to offer? Well, first know that COBRA must only be offered if the account is underspent. When the remaining FSA balance (annual election minus claims) is more than the required COBRA premiums, the account is underspent. Second, COBRA is only offered for the remainder of plan year and not for a full 18 months (it's limited).
But wait, how is the COBRA premium calculated? The FSA COBRA premium is calculated based on the remaining FSA annual election. For example, assume an individual has a $2,400 FSA annual election. If the employee terminates effective on July 1, he or she would have already paid $1,200 into the FSA. In order to access those funds after termination, the employee needs to continue to contribute to the FSA for the remaining election amount, which is $1,200. But those contributions are on a post-tax basis. So the COBRA premium would be $200 each month from July through December, plus a 2% administration fee (if the employer elects to charge it).
Now, let's assume the employee elected to put $2,400 in the FSA but had only spent $1,200 by his termination date on November 1st. So they have put $2,000 in and now have $800 left. The required COBRA premium for the remainder of the year is $408 ($200/month plus 2%). The account is considered underspent, so the employee must be offered COBRA, but only for November and December. If the employee had submitted claims for $1900 by their termination date, their remaining balance is $100, which is less than their required COBRA premium. In this case, the account would be overspent and if the plan is excepted, no COBRA is required.
Note: If your plan is NOT an excepted benefit, you will need to offer COBRA regardless of whether the account is over or underspent AND the COBRA offering runs for the full 18 months.
Employees cannot access the FSA money once they are terminated (except for claims incurred prior to the termination date). If the employee does not elect COBRA, then any balances are forfeited.
Why do I bring this up? Because there is a misconception that FSA balances are forfeited at the time of termination of employment and not all sponsors are sending COBRA notices. Yes there is a COBRA obligation and make sure you know what it might be, how it is calculated and send out the appropriate notices.