FSAs and COBRA

[Guest num1sherm]

A flexible benefits account plan states that participation (with respect to a participant's ability to make pre-tax payments for group medical insurance premiums) ends upon the termination of an individual's employment. If read in conjunction with the old 125-4 temporary regs, this suggests that the plan sponsor need not offer a terminating employee (who will receive monthly severance payments) the opportunity to pay COBRA medical premiums on a pre-tax basis out of their future severance payments (although I believe that they would be permitted to modify their FBA election so that their last actual paycheck from employment could be adjusted to allow for some COBRA health premium payments - but only to the extent that final paycheck is sufficient to cover some or all COBRA premiums). The FBA plan's language suggests however that the plan need not allow this former employee to continue to pay COBRA health insurance premiums on a pre-tax basis out of their severance payments. Does this sound right?

[papogi]

The IRS has given little guidance on this, but has said that flex premiums may be deducted from salary substitutes. Most people have taken this to mean that deductions from severance payments would be allowed. There is no reason that a plan should be required to allow this, however. If the employer wishes not to touch severance payments for pre-tax deductions, they should be allowed to make this decision. Most of 125 is written as an “upper limit” document. Employers can be more restrictive if they wish.