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pre-tax deductions to pay for COBRA


Guest Gibson
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Guest Gibson

Current employee will become a non-employee consultant as of 7/1. He will cease to be eligible as a group health plan participant, but he'll have COBRA rights. Under the cafeteria plan rules, can he prepay his COBRA premiums on a pre-tax basis from his final paycheck? I think this is permissible, but isn't he limited to pre-tax deductions to pay for coverage during the current plan year?

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Guest Gibson

Assuming that the plan permits former employees to participate, do you agree that pre-tax cafeteria deductions from the consultant's severance pay can be used to purchase COBRA coverage? Thanks

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You may want to have a look at Q&A 9 on the Cafeteria Plans Q&A Column, which seems to indicate that cafeteria plans may benefit former employees.

Also take a look at thread 8119 on the Cafeteria Plans Message Board. I read the new "final" Status Change Regulations, which permit a "change [in] an existing flex plan election . . . to pay an increased amount for COBRA coverage" as permitting the pre-payment of COBRA premiums you describe.

Finally, take a look at http://www.benefitslink.com/cobra/topics/flexible.html. The last paragraph indicates that "n the FSA context, some employers will allow for this lump sum deduction for COBRA coverage out of the particpiant's last paycheck so the deduction will be on a pre-tax basis to the employee." There is a caveat there about potential state law implications, but as long as it is made pursant to an employee's requset, I wouldn't think this deduction would be "involuntary."

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Gibson: It depends on how the employer's "Sec 125 plan document" is worded.

You are correct in thinking that the IRS allows a terminated employee to pre-pay some or all of his Cobra premiums via pre-tax wtihholdings from his paycheck(s), prior to his termination. Your belief is supported by IRC regulation 1.125-4 ©B(3)(iv).

However, "the IRS does not require the employer" to allow the employee to pre-pay the Cobra premiums (either pretax or after tax). That's why it is important to read the employer's "Sec 125 plan document" ... to see if this specific employer plan even allows any pre-payment.

I know of no welfare benefit DOL law that prevents the pre-payment (either pretax or after-tax) of medical premimus beyond the end of the plan year in which the premiums are paid. (Note: There are IRS rules which prevent some cash basis business tax payers from deducting prepaid insurance premiums ... but that is unrelated to your terminated employee's concern).

Your question concerns the terminated employee's right to pre-pay his Cobra premiums on a pretax basis beyound the end of the plan year. I know of no IRS rule that prevents such a pre-payment of a "premium only" type plan. However, I do know that pre-tax "FSA flexible spending arrangement" contributions cannot be paid in advance (But a FSA plan does not fall under COBRA).

You simply need to read the employer's cafeteria plan documnent to get a proper answer to your question.

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Some medical FSA accounts DO fall under COBRA and from what I've read, they may also be prepaid on a voluntary basis. However, the COBRA period for medical FSA is only to the end of the plan year in which the termination occurred.

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Guest Debra Button

I read the FSA rules to say that ALL health care flexible spending accounts are able to be picked up via COBRA after termination. I also don't know of a rule that says you can't have a health care FSA COBRA account the following year though that would be of no benefit to the employee since he/she would not get the tax benefit from it. Now Dependent care, that's a whole 'nother animal and is not able to be picked up via COBRA after termination.

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Final COBRA regs - 54.4980B-2, q&a 8 state that if the FSA is exempt from HIPAA requiresments, then the COBRA regulations provide 2 exceptions -

1. COBRA does not have to be available after the plan year in which the qualifying event occurs; and

2. COBRA does NOT need to be offered at all if the the maximum FSA benefit available as of the date of the event is less than the the maximum amount of premium that would be collected.

We just put in an FSA and just went through determining if it was exempt from HIPAA (it is) and what obligation regarding it under we had under COBRA.

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Guest Debra Button

Thanks Mary. I'm trying to determine in my mind when FSA would be exempt from HIPAA. Can you define that for me? Thanks again!

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Debra -

go to www.dol.gov and search for excepted benefits. The HIPAA clarification of group marketing regulations defines FSA plans as "excepted benefits under section 9831 and 9832" (and also say that no certificate needs to be issued for FSA plans and that coverage solely under an FSA is not considered creditible coverage) which is one of the criteria of the COBRA regs for plans that do not need to be offered continuation coverage.

mary

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What makes an FSA exempt??

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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