Benefit to employee for electing COBRA for FSA

[Guest Heather Sachs]

We have an employee who has underspent her FSA account. We have to offer her COBRA, what would the benefit be for her to elect COBRA if she is making the contributions with after tax dollars ?

At the end of the year, can she claim the after tax contributions on her taxes and get some "credit" back ?

I am worried that the only benefit she would have is coming out financially ahead at the end of the year. As in, she elects to continue coverage through COBRA, never makes a payment before we reimburse a large claim and then stops coverage.

Any guidance would be helpful. We need to get her election form out soon.

[Mary C]

As I see it, the benefit to electing COBRA is to give her time to incur services and claim what she already contributed - in other words, avoiding forfeiture of what she's put in. If she elects and makes a large claim (more than what is in her account), that's just part of the risk shifting inherent in the plan.

[Guest llerner]

As Mary states, there is no reason for her to elect COBRA unless she is planning to have covered expenses. Your are correct in stating that after she incurs these services, she will probably discontinue her COBRA payments since there would be no reason for her to continue these and she is permitted to do so. The good news is that her COBRA will terminate at the end of the Plan year and that will be the end of your potential loss.

Since FSAs are considered self-funded health plans, the risk is considered similar to that of an insurance carrier that receives only one month's premium and is hit with a huge claim and the QB elects COBRA. Your liability is limited to the maximum amount he/she elected at least so just think of it as part of the risk.

We don't see too many people electing COBRA on FSAs; from our experience more common (but not really widespread or "pre-meditated") is an employee having services prior to giving notice in order to max out their FSA without making the full annual contribution. Compared to the risks inherent in group medical when an employer is accused of failing properly advise employees of their rights under COBRA whereby the employee or a hospital on behalf of the employee sues only when they have a large claim and tries to figure out a way to get the funds reimbursed plus substantial fines, this is small potatoes. It's just how it works and what the employee does it really out of your control and not worth worrying about.

[LRDG]

Plans can be structured to include an option allowing participants to elect pre-tax Cobra premium deductions from a final pay check to fund Medical FSAs.

This type of arrangement has been confirmed informally by the IRS official who authored Sec. 125, at an ECFC conference in D.C., attended by leading world wide benefit consultants and 125 administrators. ECFC (Employers Counsel for Flexible Compensation), a DC lobbying organization sponsored the annual conference and respresents several hundred benefits prefessionals, including top Benefits, Pension and Flex plan consultants, smaller regional service providers, and large multi-national corporations for the past 15+ yrs.

The arrangement provides incentive for both plan sponsor (minimize adverse selection and risk shifting), and participants (pre-tax funding).