What happens if a Lifestyle Spending Account becomes subject to COBRA

[HCE]

We have an employer that runs a LSA and they have been allowing reimbursement of medical expenses.  We understand this practice makes the LSA a health plan, subject to COBRA (we don't even want to think of the other compliance headaches -- ERISA, HIPAA -- at this point).

Assuming the above, should the employer start offering COBRA on the LSA?

If the employer offers COBRA, is the entire LSA required to continue during the COBRA period, so just the medical reimbursement portion?  In other words, say the LSA provides for reimbursement of non-medical and medical expenses, during COBRA could the employer limit reimbursement only to medical expenses, or do non-medical expenses have to continue to be reimbursed, too, since that is what is allowed under the LSA during employment?

[Brian Gilmore]

I would view this in the other direction--meaning the employer should take steps to immediately remove all §213(d) expenses from the LSA.  And also look for a new LSA TPA for not flagging the issue!

I suppose in theory you could offer COBRA for the LSA, but it is not clear how that would operate given (as you noted) there are health and non-health components to the plan.  I think you could treat it like an EAP and make all types of benefits (including non-medical) available through COBRA, or try to segregate a medical-only component that is accessible through COBRA.  I'm doubtful the TPA could do that, but in theory it could work.

To me that would be the least of the concerns, though.  Think of all the issues with the LSA that could not be readily addressed:

• ERISA plan doc/SPD
• HIPAA privacy/security
• PCORI fees
• §105(h) nondiscrimination
• ACA reporting
• ACA integration to satisfy market reform provisions
• HSA eligibility
• Multiple CAA potential issues

So I would recommend against trying to shoehorn a COBRA approach into this, and instead reverse course on the medical benefit inclusion asap.

• More details: https://www.newfront.com/blog/lifestyle-spending-account-compliance-considerations

Slide summary:

2025 Newfront Fringe Benefits for Employers Guide

[HCE]

Incredibly helpful Brian.  Thank you!