Jump to content

Medical FSA and Divorce


jpod
 Share

Recommended Posts

Employee sponsors typical medical fsa, which is subject to COBRA, and an excepted benefit under HIPAA. The amount available for reimbursement during a plan year is exactly the same as the amount the participant elects to pay fo the coverage. Participating employees who elect to participate are entitled to receive reimbursements for qualifying expenses incurred for themselves, their spouses and other dependents. However, as is almost always if not always the case with these plans, only the participating employee can claim and receive reimbursements. Neither the spouse nor the dependent can perfect a claim or receive reimbursements.

Assume participating employee and spouse divorce. I believe there are two alternative reasons why the spouse does not have COBRA rights vis a vis the FSA.

1. Spouse was not a qualified beneficiary at the time of divorce, because the spouse had no independent rights under the plan; only the participating employee had rights under the plan. The employee could claim reimbursements for expenses incurred by the spouse, but the spouse could not claim or receive any reimbursements.

2. Even assuming the spouse is a qualified beneficiary, a reasonable interpretation of the regulations (if not an obvious interpretation) is that the spouse's COBRA right, if any, is to establish his or her own FSA account for the balance of the plan year, unrelated to the employee's account (because the employee is entitled to maintain his or her account for the remainder of the plan year and receive reimbursements from that account for expenses incurred by the employee, his or her dependents, and a new spouse if the employee remarries fast enough). Therefore, because in the case of the FSA I have described the spouse's cost of COBRA coverage for the remainder of the plan year is exactly equal to the amount of the reimbursements which would be available to the spouse for the remainder of the plan year (or maybe 102% of the amount available for reimbursements), the spouse does not have COBRA rights.

Any thoughts?

Link to comment
Share on other sites

  • 3 weeks later...
1. Spouse was not a qualified beneficiary at the time of divorce, because the spouse had no independent rights under the plan; only the participating employee had rights under the plan. The employee could claim reimbursements for expenses incurred by the spouse, but the spouse could not claim or receive any reimbursements.
I think the spouse is nevertheless a COBRA qualified beneficiary due to coverage, i.e. merely having his/her medical expenses eligible for reimbursement. I do not think it matters that the plan limits to the employee the only one who can make a claim and receive the reimbursement.
2. Even assuming the spouse is a qualified beneficiary, a reasonable interpretation of the regulations (if not an obvious interpretation) is that the spouse's COBRA right, if any, is to establish his or her own FSA account for the balance of the plan year, unrelated to the employee's account (because the employee is entitled to maintain his or her account for the remainder of the plan year and receive reimbursements from that account for expenses incurred by the employee, his or her dependents, and a new spouse if the employee remarries fast enough). Therefore, because in the case of the FSA I have described the spouse's cost of COBRA coverage for the remainder of the plan year is exactly equal to the amount of the reimbursements which would be available to the spouse for the remainder of the plan year (or maybe 102% of the amount available for reimbursements), the spouse does not have COBRA rights.
Or maybe the spouse's COBRA right is to continue his/her coverage in the employee's health flex account to the end of the year of divorce--for which the employee is paying the cost through payroll reductions over the remainder of the plan year, but the ex-spouse now entitled to submit claims and be reimbursed directly.

Or maybe the spouse is entitled to pay for a separate, but mirror health flex account for the rest of the plan year. For example, suppose that at the time of the divorce the employee's health flex account may yet reimburse $2,800 of health expenses in the remainder of the year, and the remaining payroll reductions are just $1,700. Is the spouse entitled to COBRA elect a separate health flex account with $2,800 of coverage for the rest of the plan year at just a cost of $1,700?

I think that an interpretation that would wipe out the spouse's COBRA rights would be less favored by courts than an equally plausible interpretation that recognizes some continued coverage right for the ex-spouse.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

Link to comment
Share on other sites

Guest Sieve

From what I understand, the IRS has informally taken the position that both the employee and the spouse (in the case of divorce being the qualifying event) are individually entitled to FSA COBRA coverage if each pays the monthly amount paid by the employee, and each is then entitled to reimbursement for the remaining amount available for the remainder of the year. Under this interpretation, then, in John's hypo, each spouse would pay $1,700 for the remainder of the year and each would be entitled to $2,800 in reimbursement for the year. So, in that case the employer would get $2,800 from the employee & just $1,700 from spouse over the course of the year, for a total of $4,500 for the year, but the employer would be on the hook for total FSA reimbusements of $5,600. This discrepancy is magnified if the qualifying event is termination of employment (or reduction of hours) towards the end of the year, and each qualified beneficiary (spouse & 3 kids & the former employee) elects FSA COBRA continuation.

But, it certainly is not a clear-cut answer. Some would say that the spouse (and any other qualified beneficiaries) must pay the full annual amount of the salary deferrals over the remainder of the year in order to be entitled to reimbursement, thus resulting in a potential $5,600 of reimbursements for $5,600 of salary deferrals (or, in other words, equal amounts of annual payments to the employer & reimbursements to the qualified beneficiaries).

TEST QUESTION: Can you guess, at least between these 2 options, which the employer likely will choose to apply?

Link to comment
Share on other sites

TEST QUESTION: Can you guess, at least between these 2 options, which the employer likely will choose to apply?
Larry...is that a trick question? I can't imagine an ER that would not be happy to have to pay out $5,600 having collected only $4,500!

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

Link to comment
Share on other sites

Guest Sieve

You caught me, John! You correctly determined that all employers will want to take extra $$ from their general assets to assist employees, in this down economy, above & beyond the employees' normal compensation & benefits (even if terminated).

By the way (on a serious note), do you have any idea what--if anything--prevents a terminated employee (or a divorced qualified beneficiary) from (i) electing FSA COBRA coverage, (ii) undergoing a procedure while paying the FSA COBRA premiums, (iii) seeking full reimbursement of the projected annual benefit from the employer, and (iv) stopping further COBRA premium payments (since payroll deduction is no longer applicable) well short of the end of the year?

Link to comment
Share on other sites

In most cafeteria plans, I do not think there is anything to prevent such gaming of the health flex account by the former EE, at the expense of the ER.

However, Harry Beker has informally suggested a plan design that can at least give the ER a legal claim for the balance of the annual cost, if the plan imposes it on all former EEs, whether ahead of or behind the 'game' when employment terminates.

COBRA continuation of a health flex account only goes to the end of the plan year of the employment termination or other COBRA qualifying event. According to Beker's informal statements, a cafeteria plan may specify that if employment terminates in the middle of a plan year for which the EE has elected a health flex account, the plan can require that now former EE's participation continues to the end of the plan year despite the employment termination. The EE is obligated to pay the remaining annual cost, and is able to tap the remaining balance of the elected amount for reimbursement of health expenses incurred during the remainder of that plan year. According to Beker, if the cafeteria plan continues the former employee's participation in the health flex account to the end of the year, it must be applied to all who terminate mid-plan year, regardless of how much or little the employee has been reimbursed to the point of termination of employment.

Some object to this provision, saying it belies the notion of risk shifting to the ER. However, that line of thinking would suggest that for an EE that remained employed the entire plan year, the health flex account benefit should be taxable for lack of risk shifting. All this plan provision does is puts the situation of the EE whose employment ends mid-plan year on a par with those EEs that remain employed for the entire plan year.

Others object saying that such a provision invades the province of the former EE's COBRA election--by, in essence, forcing a positive COBRA election. However, comparing this to the insured health benefit situation, typically health insurance is continued to the end of the calendar month of the employment termination. Is that practice then improperly invading the province of the EE to choose not to continue per COBRA? COBRA allows the qualified beneficiary the choice to continue coverage for a certain length of time rather than the coverage end earlier. This plan provision does not deny the former EE any coverage that COBRA protects.

Also, there is nothing in the 2007 proposed 125 regs that would preclude such a provision.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

Link to comment
Share on other sites

Guest Sieve

Who is Harry Beker?

This is an interesting approach, but it is contrary to what I thought was permitted with regard to terminated employees. Specifically, I wonder how this approach interacts with Prop. Treas. Reg. Section 1.125-5(d)(3), which states that "the cafeteria plan must pay the former participant any amount the former participant previously paid for [FSA] coverage . . . to the extent the previously paid amount relates to the period from the date the employee ceases to be a participant through the end of that plan year."

Hypo: Assume an individual is paid monthly [or quarterly], and health FSA salary deferrals are made at the start of the one-month [or 3-month] coverage period. Unless I am reading this reg. provision wrong, it requires the plan to repay the employee, at termination of employment, the final 2 [or 11] weeks covered by a monthly [or quarterly] deferral if termination of employment occurs 2 weeks after a monthly [or quarterly] salary deferral which is made at the start of the coverage period. If so, it certainly makes no sense to require the repayment to the employee of this amount but then permit FSA COBRA to be mandatory (thus requiring the repayment by the former employee, as a COBRA payment, of the amount required to be returned under Prop. Treas. Reg. Secion 1.125-5(d)(3)). And, this repayment provision is mandated despite the uniform coverage rule (Prop. Treas. Reg. Section 1.125-5(d)) which (i) requires that the maximum reimbursement from a health FSA must be available "at all times during the period of coverage [i.e., the plan year] . . .", (ii) does not permit the maximum amount of reimbursement to relate to the amount that already has been contributed to the FSA at any particular time prior to year-end, and (iii) does not permit the acceleration of FSA payments based on claims or reimbursements incurred.

Link to comment
Share on other sites

Mr Beker is Chief of the Health and Welfare Branch in the IRS Office of Chief Counsel--and the principal author of the 2007 proposed regs.

Prop Treas Reg § 1.125-5(d)(3) applies when "an employee ceases to be a participant". Under the design I described, the employee does not cease to be a participant until the end of the plan year in which his or her employment ends.

If the more common plan design applies and participation stops when employment does, i.e. mid-plan year, then Prop Treas Reg § 1.125-5(d)(3) requires any payments for more than the proportion of the plan year before the participation came to an end be refunded to the former participant.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

Link to comment
Share on other sites

And I believe the subsidy is not available to FSA COBRA continuees, correct?

That's what I understand Notice 2009-27 clarifies.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...