COBRA and the Health Care FSA webinar

1. COBRA and the Health Care FSA webinar

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.

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

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 COBRASecureSM product

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.

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??

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

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

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

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

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

13. HIPAA Excepted Benefits • Treas. Reg. §54.9831-1(c)(3)(v);DOL Reg. §2590.732(c)(3)(v); and HHS Reg. §146.145(c)(3)(v) provide criteria to be an Excepted Benefit under HIPAA • 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

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

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

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)

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

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

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

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

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

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

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)

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

25. COBRA for Health Care FSA COBRA premium example – Employee is QB • Jill made a $2,400 Health Care FSA election with 24 payrolls (15th and 30th of month) in a calendar year plan ($100 per paycheck) • Jill is laid-off September 3rd • Her last deduction is taken from her September 15th 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 • $233.33 X 1.02 = $238/month COBRA premium

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

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

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

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

30. COBRA for Health Care FSA COBRA premium example – Ex-spouse or child is QB • Bill and Mary get divorced August 11th • 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

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)

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

33. Questions? • Any questions can be addressed by e-mail or phone at your convenienceCompliance Department800 346 2126compliance@ebcflex.com • Thanks for Attending!! Visit our online blog: http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx