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:
- 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
- Under a health FSA the applicable COBRA premium only includes
the employee’s salary reduction for the year plus any flex contributions from
- 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
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.
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.