When Healthcare Flexible Spending Account (HCFSA) participants leave employment mid-plan year, certain actions need to be taken. These actions are often overlooked, but are extremely important in order for your Section 125 Plan to remain compliant. Employers should evaluate the former employee's account to determine if while participating the employee overspent or underspent his or her account.
Healthcare FSAs and COBRA
When an employee terminates mid-plan year and has a positive balance in their Healthcare FSA, COBRA continuation coverage must be offered. COBRA continuation coverage generally must be offered on group health plans and categorizes Healthcare FSAs as a type of group health plan. Offering COBRA continuation coverage allows participants to continue using their funds through the end of the plan year as long as contributions continue.
Let’s look at a hypothetical example. Employee A terminates employment. He has a $1,000 balance in his Healthcare FSA at the time of termination and is scheduled to get LASIK eye surgery. However, the surgery is scheduled outside of his employment dates. If Employee A’s Healthcare FSA is covered under COBRA, he can elect COBRA and still make contributions to his account. By electing COBRA and continuing to make contributions, Employee A’s service incurred dates are open, through the end of the current plan year.
Claimed More Than Contributed
In some instances, participants leave mid-plan year, but have claimed more than contributed. Claimed more than contributed means that the participant has used more than the amount currently deposited in to his or her account. For most Healthcare FSAs, the plan sponsor need not offer COBRA continuation coverage, however the employee is still eligible to use their full election amount for eligible claims incurred while still employed. Employers may not limit participants from submitting claims and getting reimbursed for eligible claims, even for amounts greater than contribution when they were employed.
Let’s look at a hypothetical example. Employee B elects $1000 at the beginning of the plan year for her annual election. Two months into the plan year, the employee has contributed $166.66 and has been reimbursed for claims totaling $500. The employee's employment ends on the first day of the third month. This employee has overspent her account because claims reimbursed exceed the contributions. Employee B generally is not eligible to elect COBRA continuation coverage for the Healthcare FSA. However, if the employee has any eligible claims incurred prior to the date of termination, those claims may still be submitted for reimbursement.
If American Fidelity Assurance Company is your Section 125 provider and you need guidance to ensure you’re in compliance, contact us. If you don’t currently offer Flexible Spending Accounts but are interested, we can help.