Health FSA COBRA Rules: When An Employer Must Offer Continuation
A health FSA is a group health plan, so COBRA can apply to it. The Treasury regulations limit that obligation in a specific way, and the answer turns on how much benefit the employee has left when the qualifying event happens.
How The Limit Works
Excepted Benefit Condition
The limit applies when the health FSA is an excepted benefit and the maximum COBRA charge for the year equals or exceeds the maximum benefit available under the FSA (26 CFR 54.4980B-2, Q&A-8(c)). For the tax side of COBRA premiums, see COBRA Premium Tax Treatment.
No Later Years
When those conditions are met, the FSA does not have to offer COBRA for any later plan year to someone whose qualifying event happened in that year (Q&A-8(d)).
The Current Year Test
The FSA must offer COBRA for the rest of the current year only if the remaining benefit available on the qualifying event date is more than the most the plan can charge for that period (Q&A-8(e)).
How To Run The Test
Start With The Annual Benefit
Take the maximum benefit available to the person under the election made before the qualifying event.
Subtract Claims Already Submitted
The regulation allows reducing the benefit by reimbursement claims submitted before the qualifying event.
Compare To The COBRA Charge
The most a plan can charge is 102 percent of the applicable premium for the period (26 CFR 54.4980B-8, Q&A-1). If the remaining benefit does not exceed that charge for the rest of the year, no COBRA obligation arises.
What Employers Should Document
Plan Document Language
State how the plan applies the limit so the rule is applied consistently.
Qualifying Event Notices
Track the qualifying event date and claims submitted as of that date for each person.
Coordinate With Your COBRA Administrator
Make sure whoever runs COBRA knows the FSA is handled under this limited rule, not like medical coverage.
Where This Comes From
Regulations
26 CFR 54.4980B-2, Q&A-8; 26 CFR 54.4980B-8, Q&A-1.
Statute
IRC 4980B, with the parallel ERISA COBRA provisions.
Questions We Get
Does COBRA apply to a health FSA at all?
Yes, a health FSA is a group health plan that can be subject to COBRA, but the regulations limit the obligation as described above.
What happens if the employee has used most of their FSA?
If the benefit left on the qualifying event date does not exceed the most the plan can charge for COBRA for the rest of the year, the plan has no COBRA obligation.
Does COBRA extend into the next plan year for an FSA?
Not when the conditions for the limit are met. The FSA does not have to offer COBRA for any later plan year.
How much can the plan charge?
Up to 102 percent of the applicable premium for the period, under the COBRA payment regulations.
Do dependent care FSAs have COBRA?
This page covers health FSAs only. Dependent care FSAs are not group health plans for COBRA purposes, so confirm with your advisor.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
ERISA (29 U.S.C. Chapter 18)
The federal law that sets reporting, disclosure and fiduciary rules for employer-sponsored benefit plans.
COBRA Continuation Coverage (29 U.S.C. 1161)
Requires many group health plans to offer temporary continuation coverage after a qualifying event.
Cafeteria Plans (26 U.S.C. 125)
The tax code section that lets employees pay certain benefit premiums before tax.
Health Savings Accounts (26 U.S.C. 223)
Tax rules for health savings accounts paired with qualifying high-deductible health plans.
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