How does COBRA apply to health flexible spending accounts (FSAs)?

Generally, a health FSA is considered an ERISA-covered health plan, and unless an exception applies, a COBRA-covered employer must offer continuation coverage to qualified beneficiaries (QBs), which would include making new elections during open enrollment. The employer will need to offer COBRA regardless of whether the account is over- or underspent. If an employee does not elect COBRA upon termination, he or she cannot access the FSA funds once terminated (except for claims incurred prior to termination date), and any balances are forfeited.

• Overspent means the participant's remaining FSA balance (total annual election minus reimbursed claims) at the time of the qualifying event is negative or less than the total of the COBRA premiums that would be charged for the remainder of the plan year.
• Underspent means the participant's remaining FSA balance (total annual election minus reimbursed claims) at the time of the qualifying event is more than the total of the COBRA premiums that would be charged for the remainder of the plan year.
• COBRA premiums are generally calculated for FSAs by taking the participant's total annual coverage amount (both employee and/or employer contributions, and including any carryover amounts), adding two percent (if charging 102% of the premium), and dividing by 12 to attain a monthly COBRA premium.

Exceptions

If an FSA is considered to be an excepted benefit, an employer will be able to limit COBRA coverage to the duration of the current plan year, and in some cases, not be required to offer COBRA coverage at all.

An FSA is an excepted benefit when all of the following conditions are met:

1. The maximum benefit of the FSA (employer plus employee contributions) does not exceed the greater of (a) two times the amount of the employee's contribution, or (b) the amount the employee elects to contribute plus $500. (If the employer does not contribute to the FSA, this requirement is automatically met.)
2. Group health insurance was available to the FSA participant during employment, and this coverage was not limited to excepted benefits such as limited-scope dental and vision coverage.
3. The maximum COBRA premium for one year's FSA coverage is equal to or exceeds the maximum FSA benefit for one year. (This is usually the case, as an employer can charge up to 102% of the premium for COBRA coverage.)

When these conditions are met, an employer may limit COBRA coverage to the current plan year, even if that date falls short of the usual coverage period. In doing so, the employer avoids the scenario in nonexcepted plans that would allow an employee to make a new election in the next plan year while still on COBRA.

Additionally, with an excepted benefit plan, an employer would not be required to offer COBRA coverage at all to participants with overspent accounts.

As an option, employers with excepted FSA plans may also choose to simply offer COBRA coverage to both over- and underspent account holders, but only through the current plan year. This would eliminate the need to determine whether each individual employee's FSA is under- or overspent at the time of the qualifying event, which could be quite time consuming.

Independent Election Rights

Under COBRA, each QB has an independent right to elect coverage. This means all QBs on the plan—a spouse and dependent children—could each elect and have their own FSA. While this scenario is unlikely, as each QB would need to contribute $102 after-tax for every $100 of coverage, it is possible. Consider a situation in which an employee and spouse divorce and the FSA is underspent; each may want to elect to continue coverage to ensure those funds are not lost.

Since independent elections among FSA QBs is rare, and the IRS has not provided much guidance, it is recommended to consult with your attorney to ensure premiums are properly calculated based on the situation.