Let’s take a vote…should you offer COBRA for a Flexible Spending Account (FSA)?
- A. Yes
- B. No
- C. That’s a loaded question!
The answer is C, “That’s a loaded question!”. Although commonly overlooked, FSAs are a COBRA eligible benefit. By definition health FSAs are a Group Health Plan and regulations require COBRA to be offered to benefits categorized as a group health plan. However, the obligation to offer COBRA depends on a number of factors.
- Is the benefit a health FSA (Sec 125) or dependent daycare FSA (Sec 132) plan?
- There is no COBRA obligation for Dependent Daycare FSA plans as they are not group health plans. Employers only need to concern themselves with health FSA accounts.
- Does the Employer qualify for limited COBRA obligation?
- In general, if an Employer classifies their health FSA as an excepted benefit, they will qualify for the limited COBRA obligation. This means the amount of time COBRA should be offered is reduced (less than 12 months instead of the standard 18/36 months) and can eliminate an FSA COBRA obligation completely in certain scenarios. If you are unsure if your FSA qualifies as an excepted benefit, click here for a step-by-step guide.
- Is the health FSA account overspent?
- Thanks to the uniform coverage rule, participants can access their FSA funds regardless of their contributions to date. This allows employees to go “negative” or overspend their account and naturally corrects itself with future payroll deductions. If the employee has overspent their FSA account (YTD claims paid exceeds YTD contributions) as of their COBRA qualifying event date, then the Employer is not obligated to offer COBRA. This exception only applies if the Employer qualifies for the limited COBRA obligation.
- What about next year?
- Unlike every other COBRA eligible benefit, COBRA obligation for health FSAs stops at the end of the Employer’s current FSA plan year. In other words, participants are allowed to COBRA their FSA plan through the end of their current plan year. They are not allowed to re-enroll in the new year for FSA benefits. This shortened timeframe only applies if the Employer qualifies for the limited COBRA obligation.
So, maybe it is a loaded question, but the answer is easy to identify. And here’s an extra credit question for you…should Employers offer COBRA for Health Reimbursements Arrangements (HRA)? Believe it or not, we snuck that answer into this article too. See if you can find the answer. We’ll review that topic in detail in our next article.