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FSAs and COBRA notice

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Is there any IRS or DOL guidance addressing what an employer is to do after a health FSA provides an ex-spouse with benefits under the employee's health FSA? The Regs. address the situation where there is a separation from employment but doesn't say much about divorce.

For example, employee has health FSA where he/she contributes $300 a month ($3600 account balance). Employee and spouse divorce and COBRA notice is required. Ex elects continuation coverage.

How does/should the ER handle this?

The DOL final regs were published in 2004 and the IRS' in 2001 (I believe). Surely this has been addressed somewhere, right?

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There are issues that are unaddressed. For instance, ERs' COBRA obligation for Medical FSA for eligible qualified beneficiaries, and EEs with court ordered out of pocket medical expense payments. Would a qualified beneficiary be entitled to 2 medical FSAs, one payroll deducted and funded by EE via court order and one funded by the non-employee qualified beneficiary?

If EE terminates employment after claiming the annual elected amount in January and the qualified beneficiary discontinues Medical FSA contributions after claiming 100% of annual elected amount, the ER's liability has tripled? Unless I have overlooked something in IRS, DOL or Treasurary, such a scenerio extends ER liability for medical FSA beyond any official descriptions published thus far.

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Exactly. How big is the bank? What can ER do to minimize liability? Has the IRS given guidance?

Sorry, but a little confused. When you ask "what can the ER do to minimize liability", what do you care, same risk as before, right? THe employee contributes to the FSA, so it is their money. Also, you only need to run the FSA through the plan year it was offered.

Does this answer your question?

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Guest dhall111

I understand your question Lexi, but I don't have an answer. I'll try to redefine your problem, maybe using different words will let someone else grasp it.

Joe has a Health FSA for $3,600 annual election. So far he has contributed $2,000.

Joe divorces Sue.

Sue is sent COBRA paperwork. (here I make an assumption) COBRA paperwork includes health, dental, and information on continuing the FSA.

How much can Sue continue the FSA for; or is she even eligible to continue the FSA?

The additional questions that I see are:

If the employer doesn't allow Sue to elect FSA, is the employer non-compliant with COBRA?

If the employer does allow Sue to elect FSA and they allow her to elect the full amount over the $2,000 that Joe has already contributed, does Joe still get to have $3,600? That would INCREASE the employer risk from $3,600 to $5,200 (3,600 for Joe plus 1,600 additional for Sue).

Now my personal 2 cents. I would think that the TOTAL that could be elected for the year between Joe and Sue could be no more than the original election amount of $3,600. But how do you decide who can contribute what?

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I believe that both the employee and the ex-spouse are entitled to the full amount of the FSA election. So, in dhall111's example, the FSA would be $3,600 for Joe and $3,600 for Sue.

Unfortunately, I can't point to guidance on this, but recall this being the answer.

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