COBRA is routinely misunderstood and there are some valid reasons for it. Nothing is straight-forward. You deal with a lot of “maybes” or “sometimes”. Rarely, do you find an “always” or “never” situation. In all honesty, you probably need a degree in Advanced Benefits Continuation Rules to know all the ins and outs. So, it is not surprising that most people get stumped by the question, “What is the link between pre-tax benefits and COBRA?”
Let’s see if we can simplify it a little (and maybe start with the easy ones).
Commuter Benefit Plans are not subject to COBRA
This is the easy one. Commuter Benefit Plans (CBPs) are not subject to COBRA. COBRA is a benefits continuation coverage for health-related benefits. So this means, Commuter Benefits are out of the picture. While not subject to COBRA, employees may have access to remaining mass transit or parking funds for a period of time following their departure. It is important to understand the specific rules for your employer’s plan. If you plan is provided by Benefit Resource, you will receive a CBP Plan Specifications which will outline these rules and key time frames to be aware of.
Health Savings Accounts are not subject to COBRA, but they play an important role in benefits continuation
Health Savings Accounts tend to get a little trickier. But, when you break it down, HSAs provide a solid option when COBRA is a factor. Technically speaking, an HSA (the account, not the insurance) is not subject to COBRA. However, since an HSA is owned by the individual, the funds in the account remain with the individual even as they move on to new opportunities or benefits. So really, there is no reason to have COBRA for the HSA.
By contrast, the underlying health insurance is subject to COBRA. The HSA (the account) plays two potential roles in connection to benefits continuation. First, individuals that elect to continue their HSA-eligible health plan coverage can continue to contribute to the HSA. Additionally, HSA funds can be used to pay premiums for COBRA or insurance coverage while unemployed.
Flexible Spending Accounts start to get messy as they are ‘sometimes’ subject to COBRA
So this is were the hair splitting begins. Flexible Spending Accounts are subject to COBRA if the total year-to-date deposits is greater than the year-to-date withdrawals. Here is a small illustration to get the idea:
|FSA Subject to COBRA||FSA NOT Subject to COBRA|
|Annual FSA Election||$1,200||$1,200|
|Deposits made year-to-date (prior to qualifying event date)||$300||$300|
|Withdrawals made from FSA||$100||$500|
|Amount eligible for COBRA||$200||$0|
Once you determine if an FSA is subject to COBRA, the next step is to determine the ‘premiums’ an employee must pay to receive the benefit. Let’s continue with the example:
|FSA Subject to COBRA|
|Amount eligible for COBRA||$200|
|Monthly Premiums (1/12 of election)||$100|
Health Reimbursement Accounts can be complicated to say the least
In general, HRAs tend to be the most complicated benefit offered. HRAs provide a lot of variety and flexibility in how they work, which creates some complication. Starting with the basics, HRAs are considered a group health plan and are subject to COBRA. That is the easy part.
The next step is to determine what the “premiums” will be for employees that elect to extend coverage under their HRA. Employers have two options for calculating HRA premiums—the past-cost method and the actuarial method. Benefit Resource can assist in determining which method to use and how to set premium levels at the beginning of a plan year. You can also learn more from IRS Notice 2011-28.
Understanding pre-tax benefits and COBRA
When it comes to pre-tax benefits and COBRA, even if you can’t find an “always” or “never” situation, you can find more information on our blog page. To keep digging into COBRA, check out one of these blogs: