COBRA CONUNDRUMS reprinted from the January, 2014 issue of Health Insurance Underwriter Magazine featuring our very own Robert Meyers.
On October 31, the IRS announced a loosening of the longstanding flexible spending account (FSA) use-it-or-lose-it rule. Since flexible spending accounts fall under COBRA, the next obvious question is … how will this change impact COBRA administration? As of this writing, there is no official guidance but we’ll attempt to unravel the “what ifs” below.
The old FSA rule
Participating employees had to use up all of their FSA funds on eligible plan expenses by the end of the year or the funds would be forfeited. Plan sponsors had the option of allowing up to a two and a half month grace period, which allowed employees a little more time to exhaust their FSA accounts.
The new FSA rule
Plan sponsors can now choose from two options: They can either keep their grace period with the use-it-or-lose-it rule intact, or they can eliminate the grace period and allow employees to roll over up to $500 of unused funds from the previous plan year.
COBRA implications under the old rule
- COBRA-qualified employers (20+ employees) who offered a medical flexible spending account were required to offer COBRA only to those with underspent FSA accounts. They did not have to offer COBRA to those who had already used up FSA funds.
- If Limited COBRA applied, the FSA portion of COBRA could be terminated at the end of the plan year in which the COBRA-qualification occurred.
- Terminated employees were allowed to make after-tax contributions to their accounts once the employer’s paychecks stopped.
- Employers were allowed to charge COBRA participants a small administrative fee.
- Most employees who terminated in the middle of a plan year, and had not yet used up their FSA funds, elected to continue the FSA under COBRA. They would lose their funds upon termination if they did not elect COBRA.
How do you know if your plan qualifies for Limited COBRA?
Generally, if the Medical FSA is funded entirely by Employee Salary Reduction and the eligibility to participate in the FSA matches or exceeds the eligibility rules for the Group Health Insurance, then the plan can offer limited COBRA to its Medical FSA participants. If the plan doesn't meet the requirements for Limited COBRA, full COBRA must be offered and administered just like any other qualifying group health plan. Because the COBRA rules are so complex, remember to check with your legal counsel.
The “what ifs” of new rule COBRA application
- If the plan is eligible only for Limited COBRA (through end of current year and not eligible to renew the benefit for the subsequent plan year), the rollover option will likely have no impact. Example: Employee is a participant in calendar year 2013 FSA plan. Employee terminates on 6/30/13. Health FSA qualifies for Limited COBRA obligation (HIPAA excepted benefit). Employee’s contributions exceed reimbursements for 1/1/13 – 6/30/13, so Employee is offered Limited COBRA and elects it. Her FSA participation will terminate 12/31/13 (even if there is an applicable claims run out period), and she would not benefit from the rollover option since she would not be eligible to participate as of 1/1/14.
- If the plan is not eligible for Limited COBRA, in the scenario above, the rollover would most likely apply. In that case, the participant could elect to continue FSA plan participation beyond 12/31/13 until COBRA eligibility expires. There is no current guidance on point, but I think that our assumption should be that for general (non-Limited) COBRA scenarios, the COBRA FSA participants will be treated like regular non-COBRA FSA participants and gain the benefit of the rollover.
- If an employee gets terminated after behaving obnoxiously at the company Christmas party and is therefore terminated on Friday, Dec. 27 with $500 left in his FSA and the plan year ends Dec. 31, the employer requirements still come down to whether the plan is eligible for Limited COBRA. The default for a Limited COBRA scenario is that the employee would be eligible only for the current year and would not be eligible to participate for 2014. If the employee had previously made an election for 2014, the employer could potentially discard it and not allow him to participate since the termination was prior to 1/1/14.
New rule recap
- The rollover provision is not a one-time event for 2014, and it may be implemented for the current plan year or for a future plan year.
- The rollover allowance does not affect the maximum amount of employee contributions (currently $2,500).
- The rollover provision is an alternative to the current 2.5 month grace period option for the Health FSA. Plans that are amended to incorporate the rollover will not be able to have the grace period. $500 is the maximum rollover amount. A plan may elect to use a lower rollover maximum (or no rollover at all), but the rollover amount may not exceed $500.
Every new rule triggers new questions and new procedures. Hopefully, you now have a bit more clarity regarding this FSA COBRA Conundrum.