If your company offers a Health Flexible Spending Account (Health FSA), you may be wondering whether employees who leave the company must be offered COBRA continuation coverage. The short answer is yes, in most cases. However, Health FSAs have special COBRA rules that can make compliance much easier than it is for medical plans.
What Is a Health FSA?
A Health FSA allows employees to set aside money from their paycheck on a pre-tax basis to pay for eligible healthcare expenses.
For example, an employee might elect to contribute $2,000 for the year and use those funds for medical expenses such as copays, prescriptions, or deductibles.
Does COBRA Apply to a Health FSA?
Generally, yes. A Health FSA is considered a group health plan, which means it is usually subject to COBRA requirements.
This means employers must:
- Provide COBRA notices when required.
- Offer continuation coverage after certain qualifying events, such as termination of employment.
- Follow COBRA administration rules.
However, most Health FSAs qualify for special rules that limit an employer’s COBRA obligations.
When Can a Health FSA Use the Special COBRA Rules?
A Health FSA can receive special COBRA treatment if:
1. Employees Cannot Receive More Than They Elect
The maximum amount available under the Health FSA cannot be more than:
- Twice the employee’s annual contribution, or
- The employee’s contribution plus $500, if greater.
Most traditional Health FSAs meet this requirement.
2. Employees Have Access to Major Medical Coverage
Employees eligible for the Health FSA must also be eligible for your company’s major medical plan.
This requirement is usually easy to satisfy if both benefits are offered to the same employees.
3. COBRA Premiums Cover the Cost of the Benefit
The cost of COBRA coverage must generally be equal to or greater than the maximum benefit available under the Health FSA.
Most employee-funded Health FSAs meet this rule automatically.
What Are the Benefits of the Special COBRA Rules?
If your Health FSA meets these requirements, you may be able to:
End COBRA at the End of the Plan Year
Unlike medical coverage, which may continue for up to 18 months or longer, Health FSA COBRA coverage can typically end when the current plan year ends.
Skip COBRA for “Overspent” Accounts
You do not have to offer COBRA if the employee has already used most or all of their Health FSA funds.
For example:
- Annual Health FSA election: $2,000
- Claims already reimbursed: $1,900
- Remaining balance: $100
If the employee would need to pay more than $100 in COBRA premiums for the rest of the year, the account is considered overspent, and COBRA generally does not have to be offered.
Key Takeaway
Most Health FSAs are subject to COBRA, but they usually qualify for special rules that reduce the employer’s responsibilities. In many cases, COBRA coverage only needs to be offered through the end of the plan year, and coverage may not be required at all for employees who have already spent most of their Health FSA funds.
By understanding these rules, employers can stay compliant while avoiding unnecessary COBRA administration.
Source: Thomson Reuters