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COBRA CONUNDRUMS - How Do New FSA Rules Apply in COBRA Scenarios?

Apr 16, 2014

​COBRA Guard
Robert Meyers
February 24, 2014

COBRA CONUNDRUMS reprinted from the ​January, 2014 issue of Health Insurance Underwriter Magazine.

On October 31, the IRS announced a loosening of the longstanding flexible spending account (FSA) use-it-or-lose-it rule. Since flexible spending accounts fall under COBRA, the next obvious question is … how will this change impact COBRA administration? As of this writing, there is no official guidance but we’ll attempt to unravel the “what ifs” below.

The old FSA rule

Participating employees had to use up all of their FSA funds on eligible plan expenses by the end of the year or the funds would be forfeited. Plan sponsors had the option of allowing up to a two and a half month grace period, which allowed employees a little more time to exhaust their FSA accounts.

The new FSA rule

Plan sponsors can now choose from two options: They can either keep their grace period with the use-it-or-lose-it rule intact, or they can eliminate the grace period and allow employees to roll over up to $500 of unused funds from the previous plan year.

COBRA implications under the old rule

How do you know if your plan qualifies for Limited COBRA?

Generally, if the Medical FSA is funded entirely by Employee Salary Reduction and the eligibility to participate in the FSA matches 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, remember to check with your legal counsel.

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