Partner

[Guest ehs]

An employee of an LLP who is participating in the health FSA (11/1 plan year) became a partner on 2/1/08. The loss of eligibility to participate would result in his termination from the FSA as of 2/1. Can the employee COBRA his FSA (participants are eligible to continue the benefit up to the last day of the plan year, after-tax) and what are the tax implications if the employee is reimbursed the entire balance (non-taxable)?

[oriecat]

The COBRA regs specify the qualifying events, which for a covered employee are only termination of employment and reduction in hours. Would becoming a partner equate to one of those? If not, then there is no qualifying event and I don't think COBRA would apply.

There are no tax implications for being reimbursed.

[LRDG]

Loss of eligibility results because of change in employment status. The status change results in participant no longer being an employee, but a partner. I would allow Cobra election for full Medical FSA election, with pre-tax deduction, reduced by prior claims, from final paycheck before status change takes effect.

I'm not convinced that a qualifying event for Cobra is restricted to reduction in hours and termination of employment. A qualified family status change cound give rise to a Cobra electon. What happened to mariage, divoirce, birth/adoption of a child, death of sopuse or dependent, to name a few?

[QDROphile]

You are mixing COBRA with section 125. A person eligible for COBRA is not necessarily eligible to have compensation reduced to pay the COBRA premium.

[oriecat]

I'm not convinced that a qualifying event for Cobra is restricted to reduction in hours and termination of employment.

Here's a link to the COBRA regulation if you would like to review it.

26CFR54.4980B-4 What is a qualifying event?

[LRDG]

26CFR54.4980B-4 What is a qualifying event?

[Title 26, Volume 17][Revised as of April 1, 2006]From the U.S. Government Printing Office via GPO Access[CITE: 26CFR54.4980B-4][Page 294-296]                        TITLE 26--INTERNAL REVENUE     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY                                (CONTINUED) PART 54_PENSION EXCISE TAXES--Table of Contents Sec.  54.4980B-4  Qualifying events.    The determination of what constitutes a qualifying event is addressed in the following questions and answers:    Q-1: What is a qualifying event?    A-1: (a) A qualifying event is an event that satisfies paragraphs (b), ©, and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further explains a reduction of hours of employment, paragraph (f) of this Q&A-1 describes the treatment of children born to or placed for adoption with a covered employee during a period of COBRA continuation coverage, and paragraph (g) of this Q&A-1 contains examples. See Q&A-1 through Q&A-3 of Sec.  54.4980B-10 for special rules in the case of leave taken under the Family and Medical Leave Act of 1993 (29 U.S.C. 2601-2619).    (b) An event satisfies this paragraph (b) if the event is any of the following--    (1) The death of a covered employee;    (2) The termination (other than by reason of the employee's gross misconduct), or reduction of hours, of a covered employee's employment;    (3) The divorce or legal separation of a covered employee from the employee's spouse;    (4) A covered employee's becoming entitled to Medicare benefits under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);    (5) A dependent child's ceasing to be a dependent child of a covered employee under the generally applicable requirements of the plan; or    (6) A proceeding in bankruptcy under Title 11 of the United States Code with respect to an employer from whose employment a covered 

employee retired at any time.

I must be missing something.

[LRDG]

oriecat Posted Feb 8 2008, 09:49 AM

The COBRA regs specify the qualifying events, which for a covered employee are only termination of employment and reduction in hours. Would becoming a partner equate to one of those? If not, then there is no qualifying event and I don't think COBRA would apply.

The Cobra link includes the family status changes, so I'm confused how the limitation to termination or reduction of hours applies.

[oriecat]

I stated that for a covered employee, the QEs are... which is true. Look at the QE's outlined in the regs.

(1) The death of a covered employee; - doesn't apply to the employee, as the employee is dead

(2) The termination (other than by reason of the employee's gross

misconduct), or reduction of hours, of a covered employee's employment; - this is what applies and what I mentioned

(3) The divorce or legal separation of a covered employee from the

employee's spouse; - this doesn't apply to the employee, only to the spouse, as the employee would not lose coverage due to this event, only the spouse would, and lose of coverage is required for something to qualify as a qualifying event.

(4) A covered employee's becoming entitled to Medicare benefits

under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg); - again, same as above.

(5) A dependent child's ceasing to be a dependent child of a covered

employee under the generally applicable requirements of the plan; or - applies only to the child, not the employee.

(6) A proceeding in bankruptcy under Title 11 of the United States

Code with respect to an employer from whose employment a covered

employee retired at any time. - I didn't mention this one, as it is not really on an employee level, but the group level.

If that doesn't help, perhaps this webpage from the DOL will help:

http://www.dol.gov/ebsa/faqs/faq_consumer_cobra.html

Qualifying Events for Employees:

* Voluntary or involuntary termination of employment for reasons other than gross misconduct

* Reduction in the number of hours of employment

The only family status change mentioned is divorce, so I'm not really sure what you mean by "includes the family status changes", when there is nothing about marriage, birth/adoption, death of spouse/dependent, etc.

[LRDG]

Note reference to birth or adoption of a child

paragraph (f) of this Q&A-1

describes the treatment of children born to or placed for adoption with

a covered employee during a period of COBRA continuation coverage, and

paragraph (g) of this Q&A-1 contains examples. See Q&A-1 through Q&A-3

of Sec. 54.4980B-10 for special rules in the case of leave taken under

the Family and Medical Leave Act of 1993 (29 U.S.C. 2601-2619).

Note reference to divorce, marriage and death:

Example 4. (i) F is a covered employee who is married to G, and both

are covered under a group health plan maintained by F's employer. F and

G are divorced. Under the terms of the plan, the divorce causes G to

lose coverage. The divorce is a qualifying event, and G elects COBRA

continuation coverage, remarries during the period of COBRA continuation

coverage, and G's new spouse becomes covered under the plan. (See Q&A-5

in Sec. 54.4980B-5, paragraph © in Q&A-4 of Sec. 54.4980B-5, and

section 9801(f)(2).) G dies. Under the terms of the plan, the death

causes G's new spouse to lose coverage under the plan.[/i]

General

© An event satisfies this paragraph © if, under the terms of the

group health plan, the event causes the covered employee, or the spouse

or a dependent child of the covered employee, to lose coverage under the

plan. For this purpose, to lose coverage means to cease to be covered

under the same terms and conditions as in effect immediately before the

qualifying event. Any increase in the premium or contribution that must

be paid by a covered employee (or the spouse or dependent child of a

covered employee) for coverage under a group health plan that results

from the occurrence of one of the events listed in paragraph (b) of this

Q&A-1 is a loss of coverage.

[oriecat]

Those both say "during a period of COBRA continuation coverage". Those are allowable changes to the coverage once you are on COBRA, but they are not initial qualifying events.

[LRDG]

I get it (DOLT!).

Thanks for the links by the way.

[oriecat]

You're welcome.

So I'm still curious if becoming a partner would equate to a termination of employment. They would still be on the payroll, wouldn't they?

[LRDG]

The employee/employer relationship is terminated and replaced with that of business partner. The loss of eligibility and loss of coverage is due to a change in employment status.

An alternative for limited partherships is to stipulate in the Plan Document that participants promoted to partner no longer meet the legal requirements for eligibility and participation and account balances in the Sec. 125/FSA will be forfeited. It goes behond IRS and DOL regs, but would eliminate the ambiguity left behind when partnerships promote from employee ranks.