Is a Flexible Spending Account COBRA Eligible?
Learn how your FSA balance determines COBRA eligibility after a job loss. Understand the rules for continuing coverage and accessing your remaining healthcare funds.
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows an individual to set aside a portion of their earnings on a pre-tax basis to pay for qualified medical expenses, which reduces taxable income. Separately, the Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that provides a temporary continuation of group health coverage that might otherwise be lost due to certain life events, such as job termination.
Determining FSA COBRA Eligibility
The ability to continue a Health FSA under COBRA hinges on its financial condition at the time of the qualifying event, such as leaving a job. An FSA is eligible for COBRA continuation only if the account is considered “underspent.” An underspent account means that the total amount an employee has contributed to their FSA year-to-date is greater than the total amount they have been reimbursed for medical claims during that same period.
For example, an employee who elected to contribute $2,400 to their FSA for the year ($200 per month) and whose employment ends on June 30 would have contributed $1,200. If they have only been reimbursed for $700 in medical expenses by that date, their account is underspent. In this scenario, the employee is eligible to elect COBRA to continue their FSA.
Conversely, if the employee had been reimbursed for more than they had contributed, the account is “overspent” and is not eligible for COBRA continuation. Even when an FSA is eligible and COBRA is elected, the coverage does not follow the standard 18-month COBRA period common with major medical plans. FSA COBRA coverage only extends to the end of the plan year in which the qualifying event occurred.
This limited duration is a specific rule applicable to FSAs under Treasury Regulations. The primary benefit of electing COBRA is to gain access to the full, original annual election amount for qualifying expenses incurred after the termination date but before the plan year ends.
The FSA COBRA Election Process
Once it is determined that an FSA is underspent and eligible for continuation, a formal election process begins. The employer or its third-party administrator is required to send a COBRA election notice. This notice details the plans available for continuation, including the Health FSA, and provides instructions on how to enroll.
Upon receiving the election notice, the former employee has 60 days from the date the notice is sent to decide whether to continue the FSA and return the completed election form. Missing this deadline will result in the forfeiture of the right to continue the FSA under COBRA.
If an individual elects FSA COBRA, they are responsible for paying the required premiums. The premium is the same as the per-paycheck contribution made while employed, but it is paid on an after-tax basis. The plan can also charge an administrative fee of up to 2% of the cost. The first premium payment is due within 45 days after the date of the COBRA election and must cover the period retroactively from the date coverage was lost.
After successfully electing and paying for coverage, the individual can resume submitting claims for qualifying medical expenses. These expenses can be incurred anytime between the COBRA effective date and the end of the plan year.