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It's Tricky: FSAs + Carryover + COBRA

Posted on May 15th, 2018

Two things happened in 1986. Run-D.M.C released their hit song, “It’s Tricky,” and COBRA became effective. Thirty-two years later, Run-D.M.C.’s music is still popular, and COBRA administration is still tricky—especially when it comes to Flexible Spending Account (FSAs). Add FSA carryover to the mix, and it gets even trickier.
COBRA only applies to FSAs which are said to be underspent.* This means that the amount available for reimbursement for the remainder of the plan year exceeds the COBRA premium for that same time period. Figuring out if the FSA is underspent involves a bit of math, so it’s best illustrated with an example.
How to determine the amount available for reimbursement for the remainder of the plan year:
  • Jay has elected to put $2,500 into his FSA, which runs on a calendar year
    • He also has $500 in carryover funds from the previous year, for a total balance of $3,000 for the plan year
  • Jay terminates employment on May 31.  At that time, he had been reimbursed for $1,100 in healthcare expenses.
  • The maximum amount available for reimbursement for the remainder of the plan year is: $3,000 - $1,100 = $1,900
How to determine the COBRA premium:
  • The maximum monthly COBRA premium is 1/12 of the employee’s election, plus a 2% administrative fee.
  • The carryover balance should not be factored into setting the COBRA premium
    • The employee would have already paid for the carryover amount with the previous year's contribution
  • The maximum monthly COBRA premium for Jay is ($2,500 ÷ 12) X 102% = $212.50
How to determine if the FSA is underspent:
  • Jay terminated employment on May 31, which leaves 7 months left in the plan year
  • The total premium for the remainder of the plan year is: $212.50 X 7 = $1,487.50
  • Since the amount available for reimbursement for the remainder of the plan year exceeds the premium for the same time period, the FSA is considered underspent, and COBRA would need to be offered
    • If the opposite were true, then COBRA would not have to be offered.
If COBRA applies to the FSA, then COBRA beneficiaries must be given the same carryover rights as current employees. Using the above example, Jay could elect COBRA for a maximum monthly premium of $212.50. Jay’s employer can only change him a premium for the remainder of the plan year, which is 7 months. 
If Jay has unused funds at the end of the plan year, then he must be allowed to carry over up to $500 for the maximum time period permitted under COBRA law. In this case, it would be an additional 11 months since termination of employment allows for 18 months of continuation coverage.
Jay’s employer is prohibited from charging him a premium for the additional 11 months of access to the carryover amount, as Jay would’ve already paid for this amount. Additionally, Jay’s employer does not need to give him the ability to make a new election to the FSA for the new plan year.
Employers can place restrictions on the carryover amounts. For example, they can structure their FSA so that carryover is only available to employees who make new elections in the following plan year. If Jay’s employer had this provision in place, then he would not be entitled to any carryover amount after the plan year was over. In other words, he’d only need to be offered COBRA for 7 months.
For more information, you can refer to IRS Notice 2015-87 (Q&Q #21-25).
Do you have a question about FSAs or COBRA? Ask the Expert!
* This assumes the FSA meets the definition of an excepted benefit.

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