COBRA and the Health Care FSA webinar

© 2012 Employee Benefits Corporation

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COBRA and the Health Care FSA webinar

Peter AntonieCompliance Communications

SpecialistEmployee Benefits

CorporationThe material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

© 2012 Employee Benefits Corporation

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Then along came COBRA!• Consolidated Omnibus Budget

Reconciliation Act (1986)• Requires health plan sponsors

(employers) to provide continuation of health plan coverage when certain events occur and for specific periods of time

• Requires specific notification procedures and timelines

• There are stiff penalties for non-compliance

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Then along came COBRA!• The Health Care FSA is a group

health plan• The Health Care FSA must

comply with COBRA

• We help the participant, client or broker understand how COBRA applies to the Health Care FSA

• We administer COBRA if the employer has also adopted our COBRASecureSM product

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Common Statement

Generally, __________ is offered to the ______ of the plan year to a qualified beneficiary who has ________ eligibility for the Health Care FSA when the Health Care FSA is _______ spent.

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Common Statement

Generally, COBRA is offered to the end of the plan year to a qualified beneficiary who has lost eligibility for the Health Care FSA when the Health Care FSA is under spent.

??WHY??

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Today’s Agenda

• Application of COBRA to the Health Care FSA

• The limited COBRA obligation• HIPAA Excepted Benefits• When the Health Care FSA is an

excepted benefit• Application of COBRA to the

Health Care FSA under the limited COBRA obligation

• Common COBRA compliance issues & the Health Care FSA

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Application of COBRA to the Health Care FSA• Same Qualifying Events apply

(e.g., termination of employment, reduction in hours, death, divorce, etc.)

• Family members have independent COBRA election rights (e.g., divorce, loss of dependent status, etc.)

• Maximum COBRA coverage period is 18, 29 or 36 months unless the Health Care FSA is subject to the limited COBRA obligation

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Application of COBRA to the Health Care FSA• IRS COBRA regulation

provides a limited COBRA obligation (coverage period) for certain Health Care FSAs

• Health Care FSAs that are Excepted Benefits and satisfy a COBRA premium condition are subject to the limited COBRA obligationCOBRA is only offered for an

under spent account to the end of the plan year

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Application of COBRA to the Health Care FSA• If the limited COBRA

obligation applies, COBRA is offered only for an under spent account to the end of the plan yearexample: employee has $400

in deductions and $150 has been reimbursed

• If the limited COBRA obligation does not apply, COBRA is offered for the normal period (18, 29 or 36 months) regardless of account value at time of the event

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Limited COBRA Obligation

For the limited COBRA obligation to apply, the Health Care FSA must:• Be an Excepted Benefit

under HIPAA• Satisfy a COBRA premium

condition

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HIPAA Excepted Benefits• Treas. Reg. §54.9831-1(c)(3)(v);

DOL Reg. §2590.732(c)(3)(v); and HHS Reg. §146.145(c)(3)(v) provide criteria to be an Excepted Benefit under HIPAA

• HIPAA’s portability provisions do not apply to Excepted Benefits

• Examples of Excepted Benefits: limited scope (free-standing) dental or vision plans and most Health Care FSAs

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HIPAA Excepted Benefits• Most Health Care FSAs are

Excepted BenefitsEmployer makes no

contribution All participants are also

eligible for the employer’s group medical plan

• Must meet two conditions to be deemed an Excepted Benefit– Maximum Benefit Condition– Availability Condition

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Excepted Benefits

Maximum Benefit Condition• Health Care FSAs solely

funded by employee deductions automatically meet this condition

• If the employer contributes more than $500 and the employee does make a pre-tax election at least equal to the employer’s contribution, the maximum benefit condition is not met

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Excepted Benefits

• Examples of Health Care FSAs that meet the Maximum Benefit Condition– An employer matching

contribution• Employer $700, Employee $700

(Annual election of $1,400 is not more than two times employee election)

– Any employer contribution of $500 or less• Employer contributes $400, Employee

contributes $200 (total election of $600 is more than 2X the employee election, but not more than $500 more than the employee elected)

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Excepted Benefits

• Example of Health Care FSA that DOES NOT meet the Maximum Benefit Condition– Employer contribution exceeds

$500 and employee contribution does not exceed the employer amount• Employer contributes $700,

Employee contributes $300

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Excepted Benefits

• Availability Condition– Participants with Health Care FSA

coverage must also have other group medical plan coverage available for the year from the employer – be eligible for the medical plan

– Other coverage does not include other Excepted Benefits such as dental or vision coverage

– Coverage is based by class of participants (e.g., full time vs. part time, those who do not enroll in the medical plan, etc), not on an individual basis

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Excepted Benefits

Examples of Health Care FSAs that meet the Availability Condition

• Employer offers all employees the group medical plan and the Health Care FSA

• Employer offers only full time employees a group medical plan and the Health Care FSA

• The group medical plan and the Health Care FSA have the same eligibility and waiting periods

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Excepted Benefits

Examples of Health Care FSAs that DO NOT meet the Availability Condition

• Employer offers group medical plan coverage to full time employees only but offers the Health Care FSA to both full time and part time employeesAvailability not met for part-time

employees

• Employer offers the Health Care FSA on date of hire, but imposes a 90-day waiting period for group medical plan coverageFor 90 days the condition is not met

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COBRA premium condition• Annual COBRA premium for the

Health Care FSA must be equal to or greater than the annual election

• Virtually all Health Care FSAs satisfy this criteria

• Example: Joe elected $1,200 for his Health Care FSA. If Joe’s COBRA premium to continue the Health Care FSA is at least $100 per month, the condition is satisfied

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Limited COBRA Obligation

When the limited COBRA obligation applies, COBRA is offered only for an under spent account to the end of the plan year

Example: employee has $400 in deductions and $150 has been reimbursed

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COBRA for Health Care FSA

Premium for Health Care FSA• IRS informal guidance –

COBRA premium for the Health FSA is the annual coverage amount (election)

• Example: Jay has four months left in his plan year. He has semi-monthly deductions of $25 per pay period ($600). Jay would pay $50 per month as his COBRA premium to the end of the plan year (or $51 if 2% is added)

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COBRA for Health Care FSACalculating the monthly COBRA premium – Employee is the QB• Start with annual election

amount• Subtract deposits made for

coverage up to event date – include deduction from last paycheck after event

• Divide remainder by number of full months remaining in plan year

• Add 2% COBRA fee

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COBRA for Health Care FSACOBRA premium example –

Employee is QB• Jill made a $2,400 Health Care FSA

election with 24 payrolls (15th and 30th of month) in a calendar year plan ($100 per paycheck)

• Jill is laid-off September 3rd• Her last deduction is taken from her

September 15th paycheck (17 deposits of $100 each)

• $2,400 election - $1,700 deposits = $700 remaining balance to deposit

• $700/3 full months remaining = $233.33/month

• $233.33 X 1.02 = $238/month COBRA premium

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COBRA for Health Care FSAOver spent account• Claims reimbursed as of event date exceed

deposits for coverage to that date• Using the prior example, Jill had $1,700 in

deposits toward her $2,400 election• If Jill had more than $1,700 reimbursed as of

her lay-off date, her account is over spent (assume she had $1,900 reimbursed with $500 remaining balance)

• Technically, her account is overspent because the amount she could be reimbursed is less than the COBRA premiums she would pay to the end of the plan year In the example, Jill would pay $714 in

COBRA premiums ($238 X 3 months) and could only receive $500 in reimbursements

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COBRA for Health Care FSAUnder spent account• Deposits for coverage exceed expenses

reimbursed as of the event date• Using the prior example, Jill had $1,700 in

deposits toward her $2,400 election• If Jill had less than $1,700 reimbursed as of

her lay-off date, her account is under spent (assume she had $1,000 reimbursed with $1,400 remaining balance)

• Technically, her account is under spent because the amount she could be reimbursed is more than the COBRA premiums she would pay to the end of the plan year In this example, Jill would pay $714 in

COBRA premiums ($238 X 3 months) and could receive $1,400 in reimbursements

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COBRA for Health Care FSA Death, Divorce or Loss of

Dependent Status• If the Health Care FSA is not an

Excepted Benefit, COBRA is offered for 36 months

• If the Health Care FSA is an Excepted Benefit, COBRA is offered to the end of the plan year for an under spent accountThe COBRA coverage elected is

the remaining balance of the annual election, not the under spent amount or total election

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COBRA for Health Care FSA

Calculating the monthly COBRA premium – Ex-spouse or child is the QB• Start with balance remaining

of annual election amount (election minus reimbursements to date)

• Divide balance by number of full months left in plan year

• Add 2% COBRA fee

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COBRA for Health Care FSACOBRA premium example – Ex-spouse or child is QB• Bill and Mary get divorced

August 11th

• The balance of Bill’s under spent Health Care FSA is $480

• $480/4 full months remaining = $120/month

• $120 X 1.02 = $122.40/month

COBRA premium

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Common COBRA compliance issues & the Health Care FSA• Not offering COBRA• Taking remaining deductions from last

paycheck without offering COBRA (violates Uniform Coverage rule)

• Taking remaining deductions from severance or payouts without offering COBRA (violates Uniform Coverage rule)

• Not including employer contributions in calculation of account election and deposits

• Offering COBRA for wrong maximum period

• Not offering COBRA for all qualifying events (e.g., divorce, death, etc)

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Conclusion

• The Health Care FSA is subject to COBRA• Most Health Care FSAs satisfy the

criteria for the limited COBRA obligation• Under the limited COBRA obligation, the

qualified beneficiary is offered COBRA only to the end of the plan year when the Health Care FSA is under spent

• The COBRA premium is the remaining deposits divided by the remaining full months X 1.02 (102%) for termination or reduction in hours

• The COBRA premium is the remaining Uniform Coverage divided by the remaining full months X 1.02 (102%) for death, divorce or loss of dependent status

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Questions?

• Any questions can be addressed by e-mail or phone at your convenience

Compliance Department800 346 2126compliance@ebcflex.com

• Thanks for Attending!!

http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx

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