Does COBRA apply to our Flexible Benefit Plan?
If you are a COBRA qualified employer and offer the Medical FSA under your flex plan... then COBRA applies.
What does COBRA require of our Flex Plan?
The Medical/Dental/Vision Care FSA is essentially treated like health insurance under COBRA, meaning terminated employees and their dependents become "qualified beneficiaries" when their coverage is lost and have the right to continue coverage under the Medical FSA during their COBRA eligibility period. Therefore, the procedures required of employers under COBRA for other health plans (Initial Notices, Election Notice, Unavailability Notice, Termination Notice, etc.) also apply to the Medical FSA.
Why would a Medical FSA participant want to continue this benefit after termination?
The following example illustrates one reason a participant would request for COBRA continuation.
COBRA Example #1: During the first five months of the plan year, Mike contributes $500 to his Medical FSA (annual coverage elected is $1,200). He terminates employment with his employer on May 30. Mike did not incur any medical expenses before he terminated. Since coverage ceases upon termination of employment, unless he elects COBRA, Mike will forfeit the $500 he contributed under the use-it-or-lose-it rule. But if Mike elects and pays for COBRA coverage and incurs $1,200 in medical expenses before the end of the plan year, Mike can be reimbursed $1,200.
Are there any special COBRA rules for the Medical FSA?
Sometimes. As long as the Medical FSA meets certain requirements, COBRA coverage only must be offered only to participants who have "underspent accounts." Further, COBRA coverage must only be offered until the end of the plan year in which the qualifying event occurred. A participant has an underspent account if the annual limit elected by the employee, reduced by reimbursements up to the time of the qualifying event, is equal to or more than the amount of the premiums for the COBRA coverage that will be charged for the remainder of the plan year. The following examples help illustrate how 'limited' COBRA must be offered.
COBRA Example #2: Mike makes a calendar year annual election of $1,200 for his Medical FSA. In February, Mike incurs and is reimbursed $623 in expenses. He terminates employment with his employer on May 30. Since on the date of termination, Mike has an account balance of -$123 (Contributions - Claims Paid), his Employer is not required to offer COBRA to Mike. Mike can still submit receipts prior to the date of termination and be reimbursed up to $1,200.
Why would a Medical FSA want to continue this benefit after termination?
Only rarely does a Medical FSA participant want to elect COBRA continuation after termination of employment. Contributions after termination are non-deductible, so there is no tax advantage. One of the only practical scenarios is to maintain eligibility to make claims against the Medical FSA in order to recover previous contributions that have not yet been "spent out."
COBRA Qualified Employer
Generally, an employer who employs 20 or more employees on a "typical business day" during the preceding calendar year is subject to COBRA. There are rules in how you determine a "typical business day" and what employees you must count. Because the COBRA rules are so complex, please consult your professional counsel.
Medical FSAs with Limited COBRA
Generally, if the Medical FSA is funded solely by Employee Salary Reduction and the eligibility to participate in the FSA match 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, please consult your professional counsel.