A type of savings account set up by an employer that allows employees to contribute a portion of their regular earnings to pay for qualified expenses, such as health or dependent care expenses. Health Savings Accounts are not subject to COBRA. HRAs or Health Reimbursement Arrangement can be subject to COBRA.
FSAs and Obamacare
There is good reason to take advantage of your FSA before 2013. After Jan. 1, 2013, there is a maximum $2,500 limit or contributions to an FSA. It becomes a lot less flexible. So the chronically ill like the elderly or disabled who use large contributions to an FSA will lose huge tax benefits. It's ironic that the law that was passed to help sick people will tax them, possibly the most.
Obamacare also imposes a "medicine cabinet tax," which disallows you to buy over the counter drugs out of your FSA, without a doctors prescription.
This will cause a few intended or ; unintended consequences, more doctors visits, fewer purchases of over the counter drugs, and probably hurt prescription drug retailers like Longs, Rite Aid, and Savon.
Reasons to elect COBRA in an FSA
The benefit of electing COBRA for an FSA is to give the beneficiary time to incur services and claim what they already contributed. They will avoid forfeiture of what they put in. If they elect and makes a large claim (more than what is in their FSA account), that's just part of the risk shifting inherent in the plan.
Since FSAs are considered self-funded health plans, the Employer's risk is considered similar to that of an insurance carrier that receives only one month's premium and is hit with a huge claim and the beneficiary elects COBRA. Employer liability is limited to the maximum amount the employee elected.
Maxing out FSA contributions
Most people do not elect COBRA on FSAs. Most employees will have medical procedures prior to giving notice in order to max out their FSA without making the full annual contribution. As long as the spending is within plan rules, it's out of the Employer's control.
If an employer fails to properly advise employees of their rights under COBRA, then the employee or a hospital sues the Employer, they may have to reimburse a large medical claim plus substantial fines.
COBRA length and FSAs
IRS regulations limit COBRA participation in most FSAs. COBRA continuation coverage under the FSA need not be offered for any plan year after the plan year in which the qualifying event occurs if the FSA satisfies two conditions:
a) The employer offers another group health plan;
and b) For the plan year in which the qualifying event occurs, the maximum amount that the FSA could charge as a premium for a full plan year of COBRA continuation coverage equals or exceeds the maximum benefit available under the health FSA for that year.
This almost always occurs.
FSAs need not make COBRA continuation coverage available as of the date of the qualifying event if:
c) The maximum benefit available to the qualified beneficiary under the FSA for the remainder of the plan year is not more than the maximum amount that the plan could require as payment for the remainder of that year to maintain coverage under the FSA.
If all three (a, b, & c) are satisfied, COBRA does not have to be offered for the FSA at all.
If just a) & b) are satisfied, COBRA has to be offered for the FSA for the balance of the current plan year only.
If both the first two conditions (a & b) are not satisfied, COBRA has to be offered for the full 18, 29, or 36 month period that would normally apply, depending on the qualifying event. This will usually only be true where the employer offers the FSA only and does not offer another group health plan.
The applicable COBRA premium during the balance of the first plan year would be 102% of the employees monthly salary reduction. The notice should disclose if COBRA only has to be offered for the balance of the first plan year, or continue after the plan year
If the employer offers another group health plan and, for the plan year in which the qualifying event occurs, the maximum amount that the FSA could charge as a premium for a full plan year of COBRA continuation coverage equals or exceeds the maximum benefit available under the health FSA for that year, IRS regulations only require that COBRA be offered until the end of the current plan year.
If COBRA must be offered for the full maximum continuation period, it should be explained the the qualified beneficiary must make the election where the premium is 102% of the new deferral. COBRA premiums are not paid pre-tax, unlike FSA contributions.
Qualified beneficiaries may want to retain FSA coverage following a qualifying event by paying the premium with after tax dollars, especially if:
a) The employee has used little of his or her deferrals at the time of the qualifying event; and
b) Is willing to pay out-of-pocket because they anticipate medical expenses before the end of the plan year plus any grace period.
FSA plan year
The definition of plan year is important in applying, for example, the effective date provisions under the final regulations and the rules for health FSAs under the new proposed regulations. Under the final regulations, the plan year is the year designated as such in the plan documents. If the plan documents do not designate a plan year (or if there are no plan documents), the plan year is the deductible/limit year used by the plan. If the plan does not impose deductibles or limits on an annual basis, the plan year is the policy year. If the plan does not impose deductibles or limits on an annual basis and the plan is not insured (or the insurance policy is not renewed annually), the plan year is the taxable year of the employer. In any other case, the plan year is the calendar year.
You can still use FSA money for eyeglasses, contact lenses, prescription drugs, dental care, and a lot of other medical expenses that insurance doesn't cover.
Craig Casey is an Writer, Coach, Blogger, Husband, and Former Health Insurance Agent helping people on the web since 1999 with their health insurance problems.
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