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February 2016


COBRA and Health FSA’s (Carryover Rule)

As described in Notice 2013-71, the IRS issued guidance allowing Health Flexible Spending Accounts (“Health FSAs”) to offer carryovers of unused balances of up to $500 remaining at the end of a plan year to be used for qualified medical expenses in a subsequent plan year. However, this Notice did not specifically address the interaction between COBRA and the carryover rule.

In December of 2015, The IRS released Notice 2015-87 which contained new guidance regarding the interplay between health FSA and COBRA. The IRS clarified that the option to carryover up to $500 on unused health FSA’s can extend to the entire COBRA coverage period instead of just the plan year. Furthermore, the IRS made it clear that upon termination, an employee that has not elected COBRA, loses the right to carryover an amount.
According to the latest guidance, plan administrators should apply these basic rules under a health FSA while administering COBRA:

  1.  In determining the amount that a qualified beneficiary can receive during the remainder of the plan year in which the qualifying event occurred, the carryover amount should be included.
  2. Under a health FSA the applicable COBRA premium only includes the employee’s salary reduction for the year plus any flex contributions from employer.
  3. The carryover amount should be accessible for medical expense reimbursement for the duration of the entire COBRA period for which the qualified beneficiary otherwise would be eligible.

These rules help offer some clarity, however the IRS brought forth two new rules which create more ambiguity. First, the IRS stated that health FSAs can be designed to allow the ability to carry over unused amounts on participation in the health FSA in the next plan year. Secondly, the IRS stated that a health FSA can limit the timeframe that a carried over amount can be accessed for reimbursements under a plan. However, the IRS failed to explain how the two new rules interact with the COBRA rules creating a bit of confusion.

For those employers and plan administrators that did implement a carryover feature after following the 2013 IRS guidance it would be wise to review their administrative practices to ensure compliance with the new rules in Notice 2015-87. Take careful consideration as to how to interpret these new rules by seeking proper counsel when in doubt.

Common Errors and Possible Solutions

Mistakes happen – no one is perfect. It is simply a fact of life. That is why Plan administrators and employers should be prepared to handle errors in the context of COBRA compliance. By identifying and analyzing common errors and their appropriate corrections ahead of time, one can minimize exposure to possible damages and penalties. The fact is, courts regularly impose penalties for COBRA errors, so take some time to learn about some common violations and their possible remedies. It will be time well spent.

At the top of the list, failure to provide timely COBRA notices is the most common error made by plan administrators and employers. If the failure involves the initial notice, the violation can usually be “undone” to the best possible degree by immediately sending the notice to the affected individuals. Keep in mind, an employer has 30 days to notify the plan administrator of a qualifying event. At that point the plan administrator must send the election notice to the covered employee, spouse and dependents within 14 days of receiving the employer's notification. If the employer and plan administrator are the same, there is a combined 44-day timeline to distribute the election notice. So in the case that an employer failed to notify the plan administrator of a divorce, for example, because he/she did not receive the COBRA notice on time, what would be an appropriate remedy? At the very least, sending out the notice even if it is late would be a good start.

Quoting the wrong premium amounts is another common error. What if the premium payment was initially quoted too low? Is going back to the qualified beneficiary and asking for the shortfall possible? Yes, but it may not be prudent. It may be better to either leave it alone for the duration, or ask for the difference going forward. Asking for the back payments retroactively could be asking for trouble. But what if the payment amount quoted was too high? It could be argued that because of this error, an individual chose not to elect COBRA and was thereby harmed. In order to remedy this situation it would seem wise to refund the difference to those individuals that have paid too much, but perhaps more importantly, re-notify those who did not elect. Offering a plan to allow additional time to pay retroactive premiums for those individuals that were re-notified and now want to elect coverage would probably be a good idea also.

It is imperative to respond swiftly and fairly upon discovering an error. Coming from a legal stance, making an individual “whole again” is often the key. In other words, if the individuals were not necessarily harmed by the violation and remain in the same position they would have been in had the error not occurred, the legal repercussions may be mitigated. Courts realize that the Employee Retirement Income Security Act of 1974 is quite complex; therefore, they can take into account whether an honest mistake should justify imposing penalties, as well as whether the plan administrator took proper action to rectify the situation once the error was identified.

In this author’s opinion, setting up system to make sure errors do not occur in the first place is paramount. Review your COBRA administrative processes regularly and make sure proper training is updated to ensure compliance. However, because we are all human acting in good faith to rectify errors once they are found, is the without question, the best policy.


In this Issue:

COBRA and Health FSA’s (Carryover Rule)

Common Errors and Possible Solutions

See Also:

COBRA Solutions
Cafeteria Plan Manager
Employee Database Manager
COBRA Administration Manager
U.S. Department of Labor
COBRA and the Trade Act of 2002
COBRA and Medicare Entitlement

Technical Information
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