Section 125 HC Account and COBRA

[LRDG]

Regs. allow for a 2% administration fee to be charged on the cobra election. I have written provisions in PD allowing cobra participants to conbribute pre tax all or a portion of their cobra election from final paycheck.

[Guest PKR]

If an employee who participates in a company sponsored Section 125 HC Spending account terminates, is the company under an obligation to offer that employee the HC account under the COBRA provision? As there are funds that may need to be reimbursed once services are performed, I would think an employee may want to elect the benefit, pay the deductions on a after tax basis, and be reibursed at some point in the future. Any guidance is appreciated.

[oriecat]

Yes, medical spending accounts are eligible for COBRA, with some exceptions for when the participant would have to contribute more than they would be able to get back out (or something like that...)

[papogi]

First, you have to determine if the health care FSA is exempt from HIPAA (most are). If it is not exempt from HIPAA, then COBRA must be offered in all the typical scenarios and for the usual time frame (18, 29 or 36 months). An FSA is exempt from HIPAA if (1) the health FSA benefit does not exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. That will always be true in an FSA which is funded completely by the employee, and true when an employer kicks in money, as long as they don't kick in too much, and (2) the employee has other group health plan coverage for the year available from his/her employer, and the other coverage is not limited to benefits that are HIPAA excepted benefits. Basically, as long as the employer also offers typical mainstream health coverage, then this part is covered.

If you determine that the health FSA is exempt from HIPAA (again, most are), there are two special exemptions from COBRA: (1) COBRA need not be offered after the plan year in which the termination occurs. This applies if the amount paid in would exceed the benefit. The 2% administrative fee guarantees this, and (2) COBRA need not be offered at all if the remaining balance available is less than the premiums required to continue the account. Basically (as someone else mentioned above), if the employee has already gotten out of the account more than he/she has put in, then COBRA need not be offered.

In most situations, COBRA almost never needs to be offered past the end of the current plan year, and only needs to be offered within the current plan year if the employee has not gotten out of the account more than what he/she has put in.