Health FSA, termination of employment and COBRA

[Jeff Kirtner]

Any problems forcing a terminated employee to remain in a § 125 health FSA through the end of the plan year in which the termination occurs, and requiring premiums for that period to be taken from the employee's last paycheck(s)? Assuming no problems, if such a plan is established, does that mean COBRA would never become available under Prop. § 54.4980B-2, A-8, so that no COBRA notices or elections would ever need to be provided? (Assume the FSA is funded solely through salary reductions and other group health coverage was available).

[Guest myvettee]

I have a question regarding FSA remibursement once an employee terminates. Employee terminates on October 15 in the current plan year. Employee remains with a balance in health care spend. acct. of $300.00. In reading the Employee Benefits Cafeteria Plan manual, it states facts regarding reimbursement of claims incurred after the participant terminates. Assuming employee never turned in any claims during the plan year, is employee able to claim reimbursement for expenses in the current plan year Jan. 1 thru Oct. 15? Thank you in advance!!!

[Joe Priselac]

Jeff,

Your description is basically correct as long as you treat all departing employees in the same way. I have seen employers who force only those employees with a "negative" balance to pay up. We feel that for this strategy to work all employees must pay for the entire annual "premium". The second part of your question is correct in that no COBRA notice would be required.

Myvette,

In your case, the employee is allowed to submit an expense that was incurred while they were employed. The employee has access to their entire annual election amount not just their cash balance at termination. If your employee had $300 in their account, but had originally elected $1500 for the plan year,they could submit a $1500 expense that happened between Jan 1 and Oct 15 and get reimbursed for the entire $1500. That all changes if they exercise their COBRA rights. In that case they can incur the expense throughout the entire plan year.

[Jeff Kirtner]

Joe,

Thank you for your response. I have a concern about the COBRA part of the analysis, however. The proposed regs state that in the FSA context there are circumstances when an employer is required to provide COBRA coverage for the remainder of the plan year in which the termination occurs. Under my proposed scheme, by forcing the terminated employee to remain in the plan for the remainder of the plan year, coverage would not be lost, so COBRA coverage would not need to be offered. I am concerned about the interaction of this rule with §54.4980B-7, A-7(B), which says COBRA coverage must be offered if the alternative coverage provided by the employer after a qualifying event (i.e. termination) "does not satisfy all the requirements for COBRA continuation coverage or if the amount that the group health plan requires to be paid for the alternative coverage is greater than the amount required to be paid to similarly situated nonCOBRA beneficiaries..." Under my scheme, there is a forced "lump sum" payment of premiums on termination, while nonCOBRA beneficiaries pay premiums monthly. Does that difference mean that COBRA must be offered? I'd appreciate any thoughts.

[Guest nb]

Jeff & Joe,

I would like to know how you could force a terminated employee to remain in a 125 plan. By definition you must be an employee to be in a 125 plan.

In an FSA, if I have a balance in my account and I have sustained expenses prior to my termination, I can still file for reimbursement, up to my initial election if I'm still within the plan limitations for filing a claim. If I don't have expenses prior to my termination, I can still elect COBRA for my FSA and still recover expenses sustained within the plan year.

If I have a negative balance when I terminate, the employer must absorb that negative balance. I know of no circumstance where the employer may recover that negative balance from the employee.

[Jeff Kirtner]

nb,

The term "employees" under § 125 includes present and former employees. Prop. Reg. § 125-1, A-4.

[Joe Priselac]

Jeff,

Let me clarify how we operate these types of arrangements. We don't take money out of the final paycheck without the participant's consent. To do so would be contrary to the proposed 125 regulations, not to mention state laws prohibiting involuntary withholdings. Any employee who wants to make the rest of his/her contributions for the plan year on a pre-tax basis may elect to sign a separate agreement permitting the necessary withholdings.The plan is written so that an employee's termination of employment is a permissible change of status. All employees know in advance that if they elect to participate in the Health FSA they are in for the full twelve months. Since coverage does not terminate with employment, there is no COBRA qualifying event. Therefore no COBRA notification is required. Because of the advantages of pre-tax withholding, most employees elect to have as much of the remaing years premium as possible taken from their last paycheck. However, they have the same availability to pay monthly or per pay cycle as any other employee. That's why we feel it would not trigger the problem you mentioned.I hope this is helpful.If you want to discuss this further you can contact me directly.

[Guest Brendas]

I had over $900 in employee contributions in my Medical Savings Account when I quit my last job. I was NEVER informed that I would lose this money by terminating my employment. I understood that I would only lose the money if I didn't turn in the claims to cover it, before the end of the calendar year. I was predicting a high cost procedure at the end of the year and tried to plan for it early. I feel the employer should honor my claims for services provided after the termination date due to the failure to inform me of the conditions of which I could and couldn't submit reimbursements.

I quit 8/30 and didn't get my COBRA letter until 12/19. I elected to continue my healthcare coverage for 3 months after my termination date. Because it is a large company and offers a seperate health plan, I was not given the opportunity to elect COBRA for my FSA. Is there any loophole I can use to recover this loss? Can I claim it as a loss on my 1999 Income Tax Return?

[JWK]

In most health FSAs you have to incur the expense while you are actively employed for it to be reimbursable. Whether this restriction applies to your plan and, if so, whether it was adequately communicated to you are questions we can't answer on the facts presented.

What is clear is that your employer had to offer you COBRA for your health FSA. This would allow you to use the "stranded" $900 provided you made a timely election and paid the applicable premium. You have 60 days to elect COBRA from the date you receive the notice of right to elect COBRA. I suggest you pursue the COBRA angle with your former employer's HR department. Refer them to the proposed COBRA regulations, issued in Feb. 1999.

[Guest Mary Ridgeway]

Whose responsibility is it - employee or employer to get premiums to insurance company under Cobra? Where can I find employer's federally mandated laws for administering Cobra? How can an employee be terminated on 10/3, employer carries thru 10/31 & insurance company states coverage til 12/1. Ins. co. not notified until 12/1 of termination. HELP!!!