The administration of flexible spending accounts is also covered under COBRA which requires most employers to provide continuing health insurance coverage to employees and their dependents.
Under the original rules of COBRA, employers were also required to offer participants in FSA programs the opportunity to continue their participation even if they were no longer eligible for the company's health insurance plan.
In 1999 the IRS introduced additional regulations that changed the treatment of FSAs and COBRA. Employers are now obligated to offer FSA continuation coverage only during the plan year in which the employee loses the eligibility for benefits.
The new rules established an exception in which employers are not required to offer employees the chance to continue their participation in FSAs at all. The exception applies when the amount the employee could receive from the FSA for the remainder of the year (the amount of the employee's annual contribution, less any deductions already made for qualified expenses) is smaller than the maximum amount the employer could require them to pay to continue their participation in the FSA under COBRA for the remainder of the year (the remaining installments of the employee's annual contribution, plus a 2 percent administrative fee).
Employees are entitled to continue their participation in the FSA only if the maximum benefit they could receive is greater than the maximum premium they could be charged under COBRA.