FSA COBRA Premiums

[Guest garygersh2]

Under our FSA plan, payroll deductions are completed by September 30th each year. An employee left us on October 31st and wants to elect COBRA coverage for the balance of the year. Can we charge this individual a monthly premium of 102% of one-twelfth of her annual FSA election amount? Or, are we required to give this individual a "free ride" since she has already completed her FSA deductions for the year prior to her termination?

[Guest JerseyGirl]

If this is a calendar year plan, which is implied in your post, there is no *free ride* for her to receive-- the employee has made 12 months worth of contributions and is entitled to 12 months worth of benefits, without any additional fees or premiums. By not having the contributions keep the same pace as the plan year itself, you have, in effect, already collected COBRA premiums from every departing participant in the plan for the final 3 months of the plan year, and have allowed them to pay with pre-tax dollars.

I am wondering what the reasoning is behind the accelerated contributions program -- doesn't it set you up for this type of scenerio to happen again?

[Guest garygersh2]

Good point regarding the "free ride" (or lack thereof). I'm not sure what the thinking was here since the plan was set up before my arrival on the scene. However, from guidance contained in FSA plan design literature that I've come across, I believe the theory behind collecting the full annual premium in an accelerated timeframe has to do with limiting a plan's exposure. By evenly spreading deductions throughout the entire year, a plan will never be able to collect the full amount from any participant who has terminated over the course of the year, even though such participants would have had access to the their full elected amount while active. I'm not sure how real the COBRA exposure is. To the extent that a participant has fully funded his/her election prior to termination, there would appear to be no real harm to the plan if such individual is able to access any remaining balance by choosing COBRA continuation on a "non-contributory" basis for the rest of the year. In this case, the former employee would only be drawing out his/her own money. So, there's no risk to the plan here. Conversely, the less an employee has contributed to the plan prior to termination, the greater would be the plan exposure if COBRA was elected since the employee could access the full remaining account balance immdiately if he/she incurred covered expenses and then drop the COBRA coverage as soon as the balance was depleted, without having made full payment of the annual election amount.