COBRA requirements and Flex Plans

The final IRS COBRA Regulations were issued on February 3, 1999. On the same day, the IRS issued proposed regulations that would modify the final regulations covering COBRA's application to a Health Flexible Spending Account. The effective date is for plan years beginning on or after January 1, 2000.

In the past, employers were required to offer COBRA continuation on a Health FSA unless COBRA's small business exception applies. Now there are two more exceptions.

First, COBRA does not need to be offered to a qualified beneficiary who has overspent their account as of the date of the qualifying event. (COBRA must be offered to those who have under-spent their account.)

Second, while COBRA must be offered to those who have under-spent their account, you may be able to cut it off at the end of the year in which the qualifying event occurs.

Three conditions must be met in order to not offer COBRA continuation:

(1) The health FSA is exempt from HIPAA. A health FSA is exempt from HIPAA if those eligible to participate in the health FSA are also eligible to participate in the employer's major medical plan and the maximum benefit payable to the employee under the health spending account exceeds two times the employee salary reduction amount (or, if greater, the amount of the employee's salary reduction under the health spending account for the year, plus $500.00), the employer must comply with HIPAA. If the employer contributes more than $500.00 to a health spending account either as "seed" money or as a match, the employer must comply with HIPAA. For Credit Based Section 125 Plans, if the employee can receive the unused portions as taxable income, then the employer need not comply with HIPAA. If the employee does not have the option to receive the unused portions as taxable income, the plan will have to comply with HIPAA only if the plan design prohibits employees from directing more than $500.00 of the employer credits to the health spending account.

(2)The maximum annual COBRA premium the Employer may charge for the health FSA coverage equals or exceeds the maximum annual health FSA coverage amount.

(3)As of the date of the qualifying event, the qualified beneficiary has overspent her health FSA account.

COBRA Coverage can be cut off at the end of the plan year in which the qualifying event occurred if the health FSA is exempt from HIPAA and the maximum COBRA premium equals or exceeds the annual coverage amount. You would not have to offer COBRA continuation at the next open enrollment.