Health Flexible Spending Accounts (FSAs) are subject to COBRA. However, most FSAs are only required to offer COBRA if the account has a positive balance. In other words, the beneficiary has contributed more that he or she has received in reimbursements. If the account is overspent, COBRA does not have to be offered.
Health FSAs carry somewhat of a gamble … the use-it-or-lose-it mandate. This feature requires beneficiaries to spend down the balance by the end of the plan year (or by the end of the 2 ½ month grace period, if applicable) or forfeit their contributions.
Late in 2013, the IRS modified the use-it-or-lose-it rule to allow a carryover of up to $500 of unused amounts. Plans can either offer a grace period or a carryover. The advent of the carryover is good news for beneficiaries but created two COBRA questions for administrators:
- Is the carryover amount considered when determining if the account is overspent; and
- Does the carryover amount increase the COBRA premium?
Thankfully, the IRS recently answered both questions in Notice 2015-87.
- Any carryover amount is included in determining the amount of benefit that a qualified beneficiary is entitled to receive. COBRA is required if contributions plus the carryover exceed reimbursements.
Example: An employee experiences a qualifying event on May 31. He had elected to contribute $2,500 to his FSA over the year and had carried over $500 in unused benefits from the prior year. As of May 31, he had submitted $1,100 of reimbursable expenses. The maximum benefit that the employee could receive is $1,900 (($2,500 plus $500) minus $1,100).
- The carryover amount is NOT included in the COBRA premium calculation. The applicable premium (102%) is based solely on the sum of the employee’s salary reduction election for the year plus any nonelective employer contribution.
Example: An employee experiences a qualifying event on May 31. He had elected to contribute $2,000 to his FSA over the year and had carried over $500 in unused benefits from the prior year. In addition, his employer provides a matching contribution of $1,000. The maximum COBRA premium is 102% of 1/12th of $3,000 times the number of months remaining in the year after the qualifying event. The $500 of benefits carried over from the prior year is not included in the applicable premium calculation.
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