Health FSA, COBRA Election for Divorced Spouse

[rocknrolls2]

Company X maintains a cafeteria plan for its employees which includes both a health care FSA and a dependent care FSA. H is an employee of X and participates in its health care FSA, contributing $3,000 for 2006. If W divorces H as of July 1 of the plan year and the plan entitles all qualified beneficiaries to elect COBRA for the remainder of the plan year, is W's election for $750 (1/2 or $1,500) or can W elect $1,500? The latter number seems unfair since the employee still has the obligation to make contributions for the rest of the year and nothing has happpened that impacts his coverage. If W can elect $750 for the balance of the year, can H's remaining contributions be reduced by 50%?

[jpod]

Please explain why a divorced spouse would ever be able to elect COBRA under the employee's FSA, or would want to do so assuming he/she could. Are you suggesting that the divorced spouse would get to tap the employee's account to some extent?

[QDROphile]

I recall that IRS thinks the former spouse can elect the full coverage amount, less amounts reimbursed to the former spouse. The regulations can be interpreted another way, but you don't simply cut the pie as you suggest; the employer has to provide more pie. Either way, the former spouse could be in a position to get more benefits than the amount of COBRA premiums actually paid and the election would be rational, especially if the former spouse knows of expenses for the year. Read the regulations and decide.

[Kirk Maldonado]

The relevant portions of Treas. Reg. section 54.4980B-2 are as follows:

Q-8. How do the COBRA continuation coverage requirements apply to cafeteria plans and other flexible benefit arrangements?

* * *

© The conditions of this paragraph © are satisfied if

(1) Benefits provided under the health FSA are excepted benefits within the meaning of sections 9831 and 9832; and

(2) The maximum amount that the health FSA can require to be paid for a year of COBRA continuation coverage under Q&A-1 of §54.4980B- 8 equals or exceeds the maximum benefit available under the health FSA for the year.

(d) If the conditions in paragraph © of this Q&A-8 are satisfied for a plan year, then the health FSA is not obligated to make COBRA continuation coverage available for any subsequent plan year to any qualified beneficiary who experiences a qualifying event during that plan year.

(e) If the conditions in paragraph © of this Q&A-8 are satisfied for a plan year, the health FSA is not obligated to make COBRA continuation coverage available for that plan year to any qualified beneficiary who experiences a qualifying event during that plan year unless, as of the date of the qualifying event, the qualified beneficiary can become entitled to receive during the remainder of the plan year a benefit that exceeds the maximum amount that the health FSA is permitted to require to be paid for COBRA continuation coverage for the remainder of the plan year. In determining the amount of the benefit that a qualified beneficiary can become entitled to receive during the remainder of the plan year, the health FSA may deduct from the maximum benefit available to that qualified beneficiary for the year (based on the election made under the health FSA for that qualified beneficiary before the date of the qualifying event) any reimbursable claims submitted to the health FSA for that plan year before the date of the qualifying event.

[QDROphile]

Don't overlook Treas. Reg. section 54.4980B-6 Q&A 6. What does it mean to have an independent right to elect COBRA coverage? Under regular health insurance, the former spouse could get full overage to the policy limits (duplicating the coverage that the employee gets). How does that apply to FSA coverage? Does the former spouse get a duplicate limit coverage limit, or do you get to divide the limit and provide a reduced ratable share to each person? If you do that, will it violate the uniform coverage rule?