Flexible Spending, Annual Enrollment and COBRA

[Guest JAD]

Coverage for an active employee terminates 12/15/99. The employee is enrolled in flex(medical account) for 99, but has already withdrawn the entire annual election. Annual enrollment is 12/1 - 12/31 and effective 1/1/00. Can the employee elect COBRA for medical only (not flex) for the last 2 weeks of 1999, add flex through annual enrollment for 2000, withdrawl the entire annual amount, and then drop flex (but continue with medical coverage) after the January's contribution?

[JWK]

Your question points out one of the major risks when a qualified beneficiary elects COBRA for a health FSA. The recently issued proposed COBRA regulations address this problem by allowing most FSAs to avoid having to offer COBRA for plan years after the plan year in which the qualifying event occurs. To qualify for this exemption, the FSA must fit the HIPAA exemption (i.e., the employer must also offer a group health plan and maximum reimbursements under the FSA cannot exceed 2x employee contributions or, if greater, employee contributions plus $500). It sounds like your FSA may qualify.

Also, since this participant has already reached his maximum reimbursement amount for 1999, under the new proposed regs, you do not have to offer COBRA for the FSA even in 1999.

A couple of caveats. First, a court would not necessarily defer to the IRS's position in proposed regs. So, even though the IRS wouldn't penalize you for not offering COBRA, you could still be vulnerable to particpant litigation.

Second, a number of practitioners question whether the IRS really has authority to redefine a group health plan and limit COBRA in this way. This uncertainty perhaps increases the likelihood of a participant challenge, as noted in point 1. But it's hard to garner much sympathy for a participant because the only participant who can benefit from contributing to the FSA in subsequent plan years is one who wants to "abuse" the uniform coverage rule.

Third, I would think you'd want your COBRA communications and your plan documents to be amended to reflect this new rule before you started enforcing it. It may be too late for this participant who has already terminated employment. I'd be interested in hearing others' comments on "operational adoption" of the new rules before an actual plan amendment.

I'd talk to legal counsel before doing anything, but it's good to know that employers now have more options to deal with this problem.