Full-time to part-time change of status and health FSA

[Guest Tigger]

:confused:

I have a cafeteria plan with dependent FSA and health FSA that excludes part-time on call (PTOC) employees. I have a full-time employee who just went to PTOC status. This participant was participating in the health FSA. Assume he elected $3,000 for the plan year and when he went on PTOC status he had contributed $1500 and had not made any claims against his account.

If he has now had a change of status to an ineligible employee and I guess is no longer a participant in the plan... how would I handle his FSA account? Does he forfeit the $1500 he has contributed even though he is still an employee of the company (assuming that he has no expenses to claim before his change)?

Any help would be GREATLY appreciated!!!!!!

TIGGER

[papogi]

Your assessment is correct. He is no longer a participant. He can submit claims with dates of service which are while he was participating. If he has no claims during that time frame, he should seriously consider electing flex COBRA, which he almost surely would be entitled to. He could elect it and keep it long enough to at least recoup his actual contributions, then drop it if he wants.

[Guest Tigger]

Would he have to keep making "premium" payments on an after tax basis?

[Guest Jeff V]

I think if he doesn't make COBRA after-tax payments, at least until he incurs eligible expenses, he'll lose it all.

Hopefully your Health FSA Plan Document has a provision for COBRA continuation, the details may be in the PD.

Also, if you haven't already, check the PD for a provision for FT employees who become PT.

[papogi]

Tigger, the COBRA premiums would be after tax, but to take it further, there might still be reasons to purchase flex COBRA. One would be if the employee has not been reimbursed at least his/her contributions. He/she might want to continue flex even with after tax dollars in order to extend the termination date long enough to cover a bunch of expenses they can stack up in the next couple months. Then they could stop paying premiums and stop flex COBRA. The other would be if the participant started the account because he/she knew of a big expense coming late in the plan year. Even if the employee continues the account clear up to the end of the plan year, they may stand to lose less than if they don’t elect flex COBRA. They may pay more in premiums because of the 2% COBRA admin fee, but they would stand to lose only this small percentage, rather than potentially several hundred dollars that may be sitting in the account at the time of termination.

Jeff V, a plan may be required to offer flex COBRA, regardless of its wording. Since this person has apparently not been reimbursed at least what has been put in, the plan will have to offer flex COBRA. The first question to ask is whether this health FSA is exempt from HIPAA. A health FSA is exempt from HIPAA if both of these are true:

1. The health FSA benefit does not exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. Assume, for example, an employee puts in $600, and the employer puts in $700. The employee is eligible for $1300, but only puts in $600 ($1300 is more than twice $600). This FSA, so far, is not exempt from HIPAA, and is subject to its rules. As another example, assume an employee puts in $100, and the employer puts in $600. The employee is eligible for $700, but only puts in $100 ($700 is more than $100 plus $500). Since such a large portion of the FSA is funded by the employer, the IRS sees this more like employer-provided insurance and is subject to HIPAA. Most employers’ health care FSA’s are funded entirely by employees. These are exempt from HIPAA since the IRS does not see them as employer-provided insurance.

2. The employee has other group health plan coverage for the year available from his/her employer, and the other coverage is not limited to benefits that are HIPAA excepted benefits. If the only other available coverage has limited scope benefits (exempt from HIPAA), the health FSA would not be exempt from HIPAA.

If you determine that the health FSA is exempt from HIPAA (most are), there are two special exemptions from COBRA:

a. COBRA need not be offered after the plan year in which the termination occurs. This applies if the amount paid in would exceed the benefit. The 2% administrative fee guarantees this, assuming that the FSA is funded completely with employee contributions.

b. COBRA need not be offered at all if the remaining balance available is less than the premiums required to continue the account.

Even if the health FSA is exempt from HIPAA, if item b immediately above does not apply, then flex COBRA must be offered for the remainder of the current plan year. All qualified beneficiaries can elect a health FSA.

If you determine that the health FSA is not exempt from HIPAA, COBRA will need to be offered under the usual COBRA rules (18, 29 or 36 months). All qualified beneficiaries can elect a health FSA.

[J2D2]

papogi,

In your response to Jeff V, you note that a health FSA is exempt from HIPAA if 2 conditions are met. Do you have a cite?

Does this exclusion extend to the HIPAA privacy rules?

Thanks.

[papogi]

The clarification was published in the December 29, 1997 Federal Register (62FR67687). It can be found here:

http://frwebgate3.access.gpo.gov/cgi-bin/w...action=retrieve

As you can see, it addresses only portability provisions.

[J2D2]

Thanks, papogi.