COBRA and the Health Care FSA webinar

© 2012 Employee Benefits Corporation 3 COBRA and the Health Care FSA webinar Peter Antonie Compliance Communications Specialist Employee Benefits Corporation The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

© 2012 Employee Benefits Corporation 4 Then along came COBRA! Consolidated Omnibus Budget Reconciliation Act (1986) Requires health plan sponsors (employers) to provide continuation of health plan coverage when certain events occur and for specific periods of time Requires specific notification procedures and timelines There are stiff penalties for non-compliance

© 2012 Employee Benefits Corporation 5 Then along came COBRA! The Health Care FSA is a group health plan The Health Care FSA must comply with COBRA We help the participant, client or broker understand how COBRA applies to the Health Care FSA We administer COBRA if the employer has also adopted our COBRASecure SM product

© 2012 Employee Benefits Corporation 6 Common Statement Generally, __________ is offered to the ______ of the plan year to a qualified beneficiary who has ________ eligibility for the Health Care FSA when the Health Care FSA is _______ spent.

© 2012 Employee Benefits Corporation 7 Common Statement Generally, COBRA is offered to the end of the plan year to a qualified beneficiary who has lost eligibility for the Health Care FSA when the Health Care FSA is under spent. ??WHY??

© 2012 Employee Benefits Corporation 8 Today’s Agenda Application of COBRA to the Health Care FSA The limited COBRA obligation HIPAA Excepted Benefits When the Health Care FSA is an excepted benefit Application of COBRA to the Health Care FSA under the limited COBRA obligation Common COBRA compliance issues & the Health Care FSA

© 2012 Employee Benefits Corporation 9 Application of COBRA to the Health Care FSA Same Qualifying Events apply (e.g., termination of employment, reduction in hours, death, divorce, etc.) Family members have independent COBRA election rights (e.g., divorce, loss of dependent status, etc.) Maximum COBRA coverage period is 18, 29 or 36 months unless the Health Care FSA is subject to the limited COBRA obligation

© 2012 Employee Benefits Corporation 10 Application of COBRA to the Health Care FSA IRS COBRA regulation provides a limited COBRA obligation (coverage period) for certain Health Care FSAs Health Care FSAs that are Excepted Benefits and satisfy a COBRA premium condition are subject to the limited COBRA obligation COBRA is only offered for an under spent account to the end of the plan year

© 2012 Employee Benefits Corporation 11 Application of COBRA to the Health Care FSA If the limited COBRA obligation applies, COBRA is offered only for an under spent account to the end of the plan year example: employee has $400 in deductions and $150 has been reimbursed If the limited COBRA obligation does not apply, COBRA is offered for the normal period (18, 29 or 36 months) regardless of account value at time of the event

© 2012 Employee Benefits Corporation 12 Limited COBRA Obligation For the limited COBRA obligation to apply, the Health Care FSA must: Be an Excepted Benefit under HIPAA Satisfy a COBRA premium condition

© 2012 Employee Benefits Corporation 13 HIPAA Excepted Benefits Treas. Reg. § (c)(3)(v); DOL Reg. § (c)(3)(v); and HHS Reg. § (c)(3)(v) provide criteria to be an Excepted Benefit under HIPAATreas. Reg. § (c)(3)(v);DOL Reg. § (c)(3)(v);HHS Reg. § (c)(3)(v) HIPAA’s portability provisions do not apply to Excepted Benefits Examples of Excepted Benefits: limited scope (free-standing) dental or vision plans and most Health Care FSAs

© 2012 Employee Benefits Corporation 14 HIPAA Excepted Benefits Most Health Care FSAs are Excepted Benefits Employer makes no contribution All participants are also eligible for the employer’s group medical plan Must meet two conditions to be deemed an Excepted Benefit –Maximum Benefit Condition –Availability Condition

© 2012 Employee Benefits Corporation 15 Excepted Benefits Maximum Benefit Condition Health Care FSAs solely funded by employee deductions automatically meet this condition If the employer contributes more than $500 and the employee does make a pre-tax election at least equal to the employer’s contribution, the maximum benefit condition is not met

© 2012 Employee Benefits Corporation 16 Excepted Benefits Examples of Health Care FSAs that meet the Maximum Benefit Condition –An employer matching contribution Employer $700, Employee $700 (Annual election of $1,400 is not more than two times employee election) –Any employer contribution of $500 or less Employer contributes $400, Employee contributes $200 (total election of $600 is more than 2X the employee election, but not more than $500 more than the employee elected)

© 2012 Employee Benefits Corporation 17 Excepted Benefits Example of Health Care FSA that DOES NOT meet the Maximum Benefit Condition –Employer contribution exceeds $500 and employee contribution does not exceed the employer amount Employer contributes $700, Employee contributes $300

© 2012 Employee Benefits Corporation 18 Excepted Benefits Availability Condition –Participants with Health Care FSA coverage must also have other group medical plan coverage available for the year from the employer – be eligible for the medical plan –Other coverage does not include other Excepted Benefits such as dental or vision coverage –Coverage is based by class of participants (e.g., full time vs. part time, those who do not enroll in the medical plan, etc), not on an individual basis

© 2012 Employee Benefits Corporation 19 Excepted Benefits Examples of Health Care FSAs that meet the Availability Condition Employer offers all employees the group medical plan and the Health Care FSA Employer offers only full time employees a group medical plan and the Health Care FSA The group medical plan and the Health Care FSA have the same eligibility and waiting periods

© 2012 Employee Benefits Corporation 20 Excepted Benefits Examples of Health Care FSAs that DO NOT meet the Availability Condition Employer offers group medical plan coverage to full time employees only but offers the Health Care FSA to both full time and part time employees Availability not met for part-time employees Employer offers the Health Care FSA on date of hire, but imposes a 90-day waiting period for group medical plan coverage For 90 days the condition is not met

© 2012 Employee Benefits Corporation 21 COBRA premium condition Annual COBRA premium for the Health Care FSA must be equal to or greater than the annual election Virtually all Health Care FSAs satisfy this criteria Example: Joe elected $1,200 for his Health Care FSA. If Joe’s COBRA premium to continue the Health Care FSA is at least $100 per month, the condition is satisfied

© 2012 Employee Benefits Corporation 22 Limited COBRA Obligation When the limited COBRA obligation applies, COBRA is offered only for an under spent account to the end of the plan year Example: employee has $400 in deductions and $150 has been reimbursed

© 2012 Employee Benefits Corporation 23 COBRA for Health Care FSA Premium for Health Care FSA IRS informal guidance – COBRA premium for the Health FSA is the annual coverage amount (election) Example: Jay has four months left in his plan year. He has semi-monthly deductions of $25 per pay period ($600). Jay would pay $50 per month as his COBRA premium to the end of the plan year (or $51 if 2% is added)

© 2012 Employee Benefits Corporation 24 COBRA for Health Care FSA Calculating the monthly COBRA premium – Employee is the QB Start with annual election amount Subtract deposits made for coverage up to event date – include deduction from last paycheck after event Divide remainder by number of full months remaining in plan year Add 2% COBRA fee

© 2012 Employee Benefits Corporation 25 COBRA for Health Care FSA COBRA premium example – Employee is QB Jill made a $2,400 Health Care FSA election with 24 payrolls (15 th and 30 th of month) in a calendar year plan ($100 per paycheck) Jill is laid-off September 3rd Her last deduction is taken from her September 15 th paycheck (17 deposits of $100 each) $2,400 election - $1,700 deposits = $700 remaining balance to deposit $700/3 full months remaining = $233.33/month $ X 1.02 = $238/month COBRA premium

© 2012 Employee Benefits Corporation 26 COBRA for Health Care FSA Over spent account Claims reimbursed as of event date exceed deposits for coverage to that date Using the prior example, Jill had $1,700 in deposits toward her $2,400 election If Jill had more than $1,700 reimbursed as of her lay-off date, her account is over spent (assume she had $1,900 reimbursed with $500 remaining balance) Technically, her account is overspent because the amount she could be reimbursed is less than the COBRA premiums she would pay to the end of the plan year In the example, Jill would pay $714 in COBRA premiums ($238 X 3 months) and could only receive $500 in reimbursements

© 2012 Employee Benefits Corporation 27 COBRA for Health Care FSA Under spent account Deposits for coverage exceed expenses reimbursed as of the event date Using the prior example, Jill had $1,700 in deposits toward her $2,400 election If Jill had less than $1,700 reimbursed as of her lay-off date, her account is under spent (assume she had $1,000 reimbursed with $1,400 remaining balance) Technically, her account is under spent because the amount she could be reimbursed is more than the COBRA premiums she would pay to the end of the plan year In this example, Jill would pay $714 in COBRA premiums ($238 X 3 months) and could receive $1,400 in reimbursements

© 2012 Employee Benefits Corporation 28 COBRA for Health Care FSA Death, Divorce or Loss of Dependent Status If the Health Care FSA is not an Excepted Benefit, COBRA is offered for 36 months If the Health Care FSA is an Excepted Benefit, COBRA is offered to the end of the plan year for an under spent account The COBRA coverage elected is the remaining balance of the annual election, not the under spent amount or total election

© 2012 Employee Benefits Corporation 29 COBRA for Health Care FSA Calculating the monthly COBRA premium – Ex-spouse or child is the QB Start with balance remaining of annual election amount (election minus reimbursements to date) Divide balance by number of full months left in plan year Add 2% COBRA fee

© 2012 Employee Benefits Corporation 30 COBRA for Health Care FSA COBRA premium example – Ex-spouse or child is QB Bill and Mary get divorced August 11 th The balance of Bill’s under spent Health Care FSA is $480 $480/4 full months remaining = $120/month $120 X 1.02 = $122.40/month COBRA premium

© 2012 Employee Benefits Corporation 31 Common COBRA compliance issues & the Health Care FSA Not offering COBRA Taking remaining deductions from last paycheck without offering COBRA (violates Uniform Coverage rule) Taking remaining deductions from severance or payouts without offering COBRA (violates Uniform Coverage rule) Not including employer contributions in calculation of account election and deposits Offering COBRA for wrong maximum period Not offering COBRA for all qualifying events (e.g., divorce, death, etc)

© 2012 Employee Benefits Corporation 32 Conclusion The Health Care FSA is subject to COBRA Most Health Care FSAs satisfy the criteria for the limited COBRA obligation Under the limited COBRA obligation, the qualified beneficiary is offered COBRA only to the end of the plan year when the Health Care FSA is under spent The COBRA premium is the remaining deposits divided by the remaining full months X 1.02 (102%) for termination or reduction in hours The COBRA premium is the remaining Uniform Coverage divided by the remaining full months X 1.02 (102%) for death, divorce or loss of dependent status

© 2012 Employee Benefits Corporation 33 Questions? Any questions can be addressed by or phone at your convenience Compliance Department Thanks for Attending!! Visit our online blog: