While most plan sponsors understand that their plans must offer continuation coverage under COBRA for their medical benefits, many administrators find themselves on less solid ground when it comes to COBRA coverage and health flexible spending accounts (health FSAs). If an employee elects to contribute to a health FSA and terminates employment, the employee may be reimbursed for medical claims incurred before the employee’s termination date. However, the employee may not be reimbursed for claims incurred after their termination date unless the employee elects COBRA continuation coverage. If an employer is subject to COBRA, it must offer COBRA coverage to all qualified beneficiaries who lose coverage due to a qualifying event if their account is underspent, meaning that the employee’s contribution for the year exceeds total reimbursements at the time of the qualifying event.
While COBRA coverage under a group health plan typically lasts 18 or 36 months, depending on the qualifying event and beneficiary, individuals who elect to continue health FSA coverage through COBRA are generally only required to have this coverage extended through the plan year in which their qualifying event occurs. However, if the employer’s cafeteria plan allows for a carryover (currently up to $660 in 2025), a qualified beneficiary will still have access to this carryover amount in the following plan year, or if earlier, until the end of their maximum COBRA period. No COBRA premium can be charged during the following plan year. Additionally, if a cafeteria plan has adopted a grace period that permits participants to use up the prior year’s election in the first 2.5 months of the next plan year, it must provide this grace period to all participants in the cafeteria plan, including individuals who are participants through COBRA.
The maximum amount that an employer may charge for COBRA continuation coverage is the full cost of coverage plus a 2% administrative fee. The cost of coverage for the health FSA will be the amount of contributions elected by the employee for the plan year. To determine the applicable monthly premium, the employer must take the total amount elected plus the 2% administrative fee and divide this total figure by 12.
Most plans provide that qualified beneficiaries who elect COBRA must pay for COBRA coverage with after-tax dollars, making contributions to a Health FSA much less attractive for the individual. Therefore, while it is not likely that an employee will elect to continue coverage for their health FSA, employers are still required to offer the option and must send a COBRA notice to all COBRA eligible participants. Failure to provide this option can result in heavy penalties, so it is important to ensure that all COBRA-eligible beneficiaries are provided with the opportunity to self-elect.
[View source.]
