FSA Health Reimbursement account and COBRA

[Guest moseelig]

This I know: a participant terminates and has "over spent" his account, the employer does not need to offer continuation coverage; a participant has "under spent" his account, the employer must offer continuation coverage.

This I don't: At the beginning of the plan year the Employer gives money (assume $200/month) to each of the participants to shop for benefits. A participant terminates, and to date has not used up any of the money. Upon termination employer contributions cease. Must the employer offer the participant continuation coverage, and if so, would the participant then make a new election, or continue making the same contributions he elected (the amount the employer was contributing on his behalf)?

Does the answer change if the employee contributed additional amounts to the Health FSA (assume $100 on top of the Employer contribution of $200/month)?

[papogi]

For an FSA to get around some of the COBRA requirements, one of the things it needs is to be exempt from HIPAA. One of the standards to meet that requirement is that the health FSA benefit cannot exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. In your example where the FSA is funded entirely by the employer, this FSA would not be exempt from HIPAA, so full COBRA rules would apply. By “full,” I mean that COBRA must be offered, and the 18-month (plus) rules apply. The employee would typically pay for it monthly, with the amount being $200 plus 2% (following your example). In your second example, however, the employee puts in $1200 annually, and the employer puts in $2400 annually. The employee is eligible for $3600, and this is more than twice the $1200 the employee is contributing, so this FSA is not exempt from HIPAA, either. Again, full COBRA rules would apply.

[Guest nobletorch]

Hello--

Interesting discussion - but I am a little confused. The employers contribution is two hundred per month to the FSA - which would normally be used to offset medical deductibles, copay, and co-insurance or other medical expenses that are not covered by a medical program. So I am not sure I understand the rational for the $200/month contribution to the FSA.

Regardless following the date of termination the employee would be required to continue the contribution if they elected to continue the FSA under COBRA. The employer would not continue to make their contiribution. Additionally any contribution to the FSA following the date of termination would not be a payroll deduction and thus it loses it the tax advantage. The advantage to continuing the FSA from the employee's standpoint is very marginal.

[Guest benefitsmom]

There could be an advantage to the employee under the following facts:

Employee terminates early in the plan year and expects a large expense in the near future (major dental work, for example). If the employer contribution was $200 and the employee contribution was $100, the COBRA payments would be $306/month. The employee can continue for only a few months, schedule the expensive procedure, incur the expense, collect up to the total annual benefit ($3600), and then cease paying COBRA premiums.

[papogi]

In addition, even if the participant doesn’t expect a large bill in the near future, assume the participant expects a large bill just before the end of the plan year. In this case, the participant pays in the rest of the annual election, although it is post-tax, and pays the 2% admin fee. The participant then empties the account completely. The participant loses money, yes, but it might be a lot less than if he/she had not elected flex COBRA and might have stood to lose much more money earlier in the year.