Q&A: Does COBRA Continuation Coverage Apply to FSAs

Question:

Our company contributes $500 to each employee’s Health Flexible Savings Account (FSA), regardless of whether the employee also contributes, at the beginning of each plan year.

When an employee separates from employment, does COBRA continuation apply to the $500 for employees who haven’t elected to contribute anything themselves?

Answer:

The application of COBRA continuation to Health FSAs is confusing at best. A little background explanation might be helpful.

In general, COBRA requires employers with 20 or more employees to allow participants in a group health plan to continue their coverage for 18-36 months after they would otherwise lose coverage. For this purpose, “group health plan” is defined to include medical, dental, and vision coverage as well as Health FSAs.

However, the rules regarding Health FSAs differ from those for the other types of coverage. For example:

1. COBRA does not need to be offered unless the employee’s FSA is “underspent,” meaning they have money in their FSA at the time of termination.
2. When COBRA does need to be offered, it can be terminated at the end of the current plan year instead of the 18-month timeframe that applies to other types of health plans.

So, in your example, you would need to offer COBRA to employees who haven’t spent their full $500 at the time of termination.

With that said, the obvious question is whether you can charge a COBRA premium and, if so, how it’s calculated. 

The monthly COBRA premium would be 1/12^th of:

• The maximum amount available to the employee under the health FSA for the year, not including any carryover from the previous year.

PLUS

• The 2% administrative fee

For an employee who terminates employment with $500 in their FSA, the monthly COBRA rate would be calculated as: ($500 + $10 admin fee) ÷ 12 = $42.50. In a situation like this, you would be justified in wondering why an employee would elect COBRA for their FSA balance when they have to pay for it.

The answer will depend on the circumstances. For example, if an employee had an unused carryover amount from the previous plan year, that amount would be available to them and wouldn’t be included in the calculation of the COBRA rate. In that situation, electing COBRA would make sense financially. Employees should evaluate their personal circumstances to decide if electing COBRA for an FSA is worth it.