COBRA and health FSA's

[alexa]

Is an employer required to allow employees to continue to contribute to a medical FSA after they have been furloughed/terminated? How does this work?

Currently we are allowing employees to continue their contributions to a medical FSA to the end of the benefit year

[GBurns]

The whole idea of an FSA is to allow an employee to get a tax deduction by being able to pre-tax money to be set aside for the expenses of medical care.

If the employee is terminated and therefore no longer on the payroll, how can you deduct on a pre-tax basis the contribution to the FSA?

[Jbentz]

In COBRA seminars, FSA's are considered a health plan and are, therefore meets the COBRA requirments. That means they must be offered just like health and dental. They can continue the contribution even though they lose the tax savings. Some employees may consider this if they know they have a large balance of unused funds. Others may want to take advantage of the situation.

Either way, in the past, I have always offered the plan with the COBRA paperwork.

[alexa]

This is being done on an after-tax basis

[GBurns]

If an employee terminates with a balance left in the FSA and under COBRA you allow them to submit claims and get reimbursements from the balance in the FSA, that is one thing.

But, why would the employee want to make any contribution on an after tax basis? There is no benefit of pre-tax treatment and any amounts contributed are subject to the risk of forfeiture if not used. The employee could just as well use up the balance then pay out of pocket and not have the risk of forfeiture.

[Jbentz]

This is appealing if you want to sign up for another year and make one contribuiton, then stop. The entire amount that you have elected can be paid out to you. For example, I quit today and I elect to COBRA my FSA. I pay my last December premium and then elect to take it for the next calendar year. I have laser eye surgery on January 3rd and put my claim in for reimbursement. I make one payment for January, and then stop. I fall under the same guidelines for the FSA and the company takes a loss. i get my surgery for 1/12 of the cost.

I agree, it is sneaky, but legal. This is the way of FSAs.

[Mary C]

Yes, a medical reimbursement account or FSA is subject to COBRA regulations for continued coverage after termination and may be subject to HIPAA, too.

Couple points to consider - expenses incurred after termination of employment usually are not eligible to be reimbursed from an FSA unless the participant has continued the plan via COBRA. Therfore, if I have an unreimbursed balance of $2,500 and know I'll be incurring expenses next month, it would be to my advantage to continue on COBRA with after tax dollars to recoup my unreimbursed balance rather than lose it.

And depending on whether the medical reimbursement account plan is HIPAA exempt or not, COBRA may only need to be offered for the remainder of the plan year in which the termination occurs. (An FSA plan may be HIPAA exempt if it is funded soley by employee contributions and the maximum benefit an employee can receive is limited to these contributions and the employer has another health care plan not exempt from HIPAA.)

[PhilB]

Can an employee make after-tax contributions to a FSA in a situation other than COBRA - for example, during a leave of absence?

[papogi]

Absolutely. After the LOA, the employee can come back on to pre-tax payroll deductions.

[Guest AHayhow]

What if you charge the employee that elects COBRA for the Health FSA the 2% admin fee? that will put the employee over their original annual election. Do you still have to offer COBRA for the health FSA?

[papogi]

The 2% admin fee issue only matters when looking at whether or not COBRA should be offered after the year in which the termination took place. It does not affect the plan year in which the term happened. For HIPAA-exempt flex accounts (this is most FSA's) flex COBRA must be offered for a period up to the end of the current plan year if the employee has not been reimbursed an amount equal to or greater than he/she put into the account year to date. HIPAA-exempt FSA's do not need to offer flex COBRA past the year of the term date if they charge a 2% admin fee, but again, they do need to offer it inside the year the termination took place if the employee hasn't gotten out of the account an amount equal to or greater than was put in.

[Kirk Maldonado]

Jbentz:

The abuse you mentioned has been eliminated in the latest set of COBRA regulations.