FAQ: Does COBRA Apply to Health Flexible Spending Accounts?

Q: Does COBRA Apply to Health Flexible Spending Accounts (“FSAs”)

A: Federal COBRA continuation applies to all “group health plans” as defined in the statute. Although often forgotten, Health FSAs clearly fall within the definition of group health plans that are subject to COBRA. The only full exemptions to COBRA for Health FSAs are for plans maintained by small employers (less than 20 employees), churches, and the federal government.

Although subject to COBRA, continuation coverage for Health FSAs often differs from continuation coverage for other group health plans, such as major medical. Most Health FSA plans meet certain conditions that qualify the plan for “Limited COBRA,” which applies to Health FSAs that qualify as HIPAA excepted benefits under current law.

Whereas plans subject to “full” COBRA are required to offer continuation coverage to all terminating employees for a period of up to 18 months, Limited COBRA significantly lessens the requirements placed upon employers subject to COBRA. The two fundamental principles of Limited COBRA for Health FSAs are:

  1. Employers are only required to offer COBRA coverage to qualified beneficiaries who have “underspent” their Health FSA accounts as of the date of the qualifying event; and
  2. For those who have underspent their accounts, COBRA coverage must be offered, but only until the end of the plan year in which the qualifying event occurs (with certain carryover considerations).

A qualified beneficiary who elects COBRA will generally pay for COBRA coverage with after-tax dollars by writing a personal check to the employer. Although it is rare, some employers design their plans to permit employees electing COBRA to pay for coverage through the end of the plan year with pre-tax dollars out of their final paychecks.