healthcare FSA and terminated employee

[alexa]

We have several employees who terminated this year (7/31/2020) and as part of a severance agreement their H&W benefits were continued including health FSA

1 of the employees severance benefits continue into 2021

We offer changes at open enrollment . Should we offer him the opportunity to do health FSA for 2021?

Does anyone see an issue for post July 2020 healthcare FSA deductions being allowed.

 

Much thanks

Alexa

[Brian Gilmore]

@alexa A number issues to be aware of:

• Your Section 125 cafeteria plan almost certainly provides that participants remain eligible for the health FSA only while employed.  Upon termination, they likely have standard run-out period (typically 90 days), with the option to continue coverage through COBRA if the account is underspent.
• Failure to follow the terms of the written cafeteria plan document jeopardizes the Section 125 safe harbor from constructive receipt, potentially resulting in all cafeteria plan elections becoming taxable for all employees.
• COBRA is available only through the end of the plan year in which the qualifying event occurs (with the exception of carryover funds that may continue to be available for the standard maximum coverage period).
• Employees will have no way to contribute pre-tax to the health FSA after termination of employment unless they continue to receive a standard payroll stream of payment as severance.
• I suppose in theory you could create a sort of retiree eligibility for the health FSA for as long as the cafeteria plan provided, the TPA could accommodate, and the terminated employee continued to receive regular severance payments, but I've never seen that attempted.

What I would recommend is dropping that approach and simply moving to COBRA subsidies--while being careful to avoid potential §105(h) nondiscrimination issues.  That's typically the only way you can accomplish employer-paid continuation of any H&W benefit without creating a retiree plan (which likely isn't your goal or blessed by the carriers/stop-loss).  

A couple posts that may be helpful:

• https://www.theabdteam.com/blog/health-fsa-reimbursements-termination-employment-2/
• https://www.theabdteam.com/blog/cobra-subsidies-reimbursement-2/

[alexa]

Thanks Brian

We would not have employer paid FSA but on a pre-tax basis to continue to allow for 2021 FSA at their election; they are on payroll till severance payments end. Their COBRA doesn't start until end of their severance period. Don't think we will have discrimination testing issues since we offer benefits to all employees per our severance plan with exception of our smaller division who we doo not offer benefits upon severance. Would we have to do separate discrim test on just  term group?

Have  another question regarding Health savings account which is new for 2020

What if 1 of these severed folks elects the high deductible plan , could we offer the health savings account to these terminated severance folks?

Much thanks

Alexa

[Brian Gilmore]

@alexa Again, be very careful about offering the HDHP or any other major medical plan to terminated employees on severance.  That likely is creating an unintended retiree plan, and you would need to be extremely cautious about first receiving carrier/stop-loss approval.  The standard way to accomplish that goal is through COBRA subsidies.

No issues with contributing to the HSA of a retiree or COBRA participant enrolled in the HDHP.  They could also make pre-tax contributions through the cafeteria plan through severance.  That's an unusual post-employment offering because the HSA is not a GHP, but it's permitted.

[alexa]

I touched base with our broker re; stop loss issues and he seemed to think no issue w/o touching base with our current stop=loss carrier

luckily we are talking about a few folks

Broker did say we would note this with our new stop-loss carrier since we are shopping stop-loss carriers  for 1/1/21

Much thanks
alexa