Notice 2013-54 and COBRA Reimbursements in Severance

[401 Chaos]

I have seen some secondary / informal guidance and discussion suggesting that the prohibitions on reimbursing individual premium expenses under IRS Notice 2013-54 (and related DOL guidance, etc.) extend to prohibit tax-free reimbursement of premiums of COBRA coverage under the former employer's group health plan for a departing employee. That makes sense to me and I can see why requiring that these reimbursements be treated as taxable under 2013-54.

Given the guidance, it is unclear to me whether merely treating the reimbursements as taxable amounts is sufficient for compliance. It seems that the evolving interpretation of the guidance is that in order for payment of the premiums to be permitted the amounts must not only be taxable but not provided on a strict reimbursement basis or with restrictions on the use of the amounts. Again, while I can understand the rationale for that under the rules, the reimbursement of COBRA premiums under an employer's existing group health plan seems a bit distinguishable from reimbursement of individual coverage, etc. where the employer does not provide regular group coverage.

I was wondering if anybody had seen any formal or direct guidance from the regulators on this specific issue. My concern is that many many employment agreements are drafted to provide for actual reimbursement of COBRA premiums as part of a departing employee's severance package. Although having such reimbursements treated as taxable may not be inconsistent with existing employment agreements, having to pay the amounts out regardless of whether the departing employee elects COBRA is very different from how such provisions are typically interpreted / administered. Furthermore, providing for such amounts on a non-reimbursement basis would seem to destroy the potential 409A exemption for reimbursement of health coverage amounts for the COBRA period.

Would welcome any thoughts on this as I haven't found much discussion or guidance on this specific area. Thanks

[Flyboyjohn]

I would argue that since 2013-54 only prohibits payment/reimbursement of premiums for individual coverage it is not applicable to COBRA premiums since they relate to a group plan

[401 Chaos]

Thanks Flyboy. That would be my hope / reading as well but I don't recall seeing anything formally or informally from the regulators on that. Was hoping others may have. I have seen some discussions that suggest it might be a problem. Most reasoned discussion I've seen has come from EBIA which agrees that the prohibition arguably does not apply to an employer's payment of COBRA premiums but they conclude noting further clarification of this issue is needed.

[kmbing1]

401 Chaos, can you tell me which EBIA manual or other publication you found that discussion in?

Thanks Flyboy. That would be my hope / reading as well but I don't recall seeing anything formally or informally from the regulators on that. Was hoping others may have. I have seen some discussions that suggest it might be a problem. Most reasoned discussion I've seen has come from EBIA which agrees that the prohibition arguably does not apply to an employer's payment of COBRA premiums but they conclude noting further clarification of this issue is needed.

[Dennis G.]

Maybe this is the wrong place to ask this question, but can a terminated employee who had an FSA account with his former employer use funds in the FSA account to pay the COBRA coverage premium payments?

[GBurns]

I agree with Flyboyjohn that 2013-54 is not applicable. However, your language needs to be clarified, COBRA is applicable to departed or former employees. It is not applicable to "departing" employees, in that they are still employees until they do depart.

Here is a good opinion on the issue:

http://www.swlaw.com/blog/employee-benefits/2014/07/31/subsidized-post-termination-cobra-benefits/

[GBurns]

Dennis G. As far as I am aware, the funds in an FSA cannot be used to pay premiums including COBRA.