Starting with the basics

The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time because of certain qualifying events, such as any of the following:

• Voluntary or involuntary job loss
• Reduction in hours worked
• Transition between jobs
• Death
• Divorce
• Other life events

The law does not apply, however, to plans sponsored by the federal government or by churches and certain church-related organizations.

Employers with fewer than 20 employees generally are exempt from the federal COBRA rules, but certain states offer "mini-COBRA" plans that might apply to those employer groups.

Length of coverage under COBRA is determined by the type of qualifying event and reason for coverage, providing the employee or dependent access to coverage for 18, 29, or 36 months.

Employers are required to provide covered employees and their families specific notices intended to help covered individuals understand their COBRA rights. Clear rules must be established for how COBRA continuation is offered, how qualified beneficiaries make elections, and when the coverage may be terminated.

Covered employees: A covered employee under COBRA is anyone who is included under a group health plan by virtue of an employment relationship with the employer. For example, retirees or former employees might be covered by the plan because of their former employment with the employer. Although self-employed individuals, independent contractors, and directors do not have to be counted as employees under the small business category, they are eligible for COBRA if their relationship to the employer makes them eligible to be covered by the employer's health insurance plan. Employees who are eligible for the plan, however, are not considered covered employees unless they are enrolled in the plan.

Covered plans: A group health plan is required to offer COBRA continuation coverage only to qualified beneficiaries after a qualifying event has occurred. A group health plan is any arrangement that an employer establishes or maintains to provide medical care to employees or their families, whether it is provided?through insurance, by a health maintenance organization, from the employer's assets, or through any other means. Medical care includes, but is not limited to:

• Inpatient and outpatient hospital care
• Physician care
• Surgery and other major medical benefits
• Prescription drugs
• Dental and vision care

Although HFSAs are subject to COBRA, special rules apply:

• COBRA terminates at the end of the plan year in which the qualifying event occurs (instead of the usual 18-month maximum continuation period); and
• No COBRA offer is required if the employee's HFSA is overspent at the time of the qualifying event.

"Overspent" means that the remaining HFSA benefit (i.e., annual election amount minus claims already reimbursed) is less than or equal to the COBRA premiums that would be required for the rest of the plan year.

For instance, let's assume the employee had elected $1,200 for a calendar-year HFSA, received $1,000 in eligible claim reimbursements, and then terminated employment on June 30. The HFSA was overspent because the remaining annual limit of $200 is less than the amount of COBRA premiums ($600) that would be due for July through December. In that case the employer is not required to offer COBRA. (Note that the 2% administrative charge for COBRA is disregarded in our example.)

Because of claim lag, it can be difficult to determine whether a particular employee's HFSA is overspent upon termination. For this reason, some employers prefer not to apply the overspent rule and instead offer COBRA to all HFSA participants.

HFSA carryover provisions: Starting in 2013, employers have had the option of adding a carryover provision to their HFSA plan. The typical provision allows the employee to carry over up to $500 of unused HFSA contributions from one plan year to be used during the following plan year.

The HFSA plan may limit availability of the carryover provision to employees who elect to participate the next year. The plan also may restrict use of the carryover to a specified period; for instance, an amount carried over from 2015 must be used during the 2016 plan year or it will be subject to forfeiture. Last, an HFSA that offers a grace period is prohibited from including a carryover provision.

HFSA carryover provisions have become very popular because they offer employees flexibility and help reduce "use or lose" forfeitures. Although welcomed by employees, carryover provisions have added to the confusion for employers and COBRA administrators. Luckily for brokers and employers, the IRS issued IRS Notice 2015-87 to provide additional guidance by answering these commonly asked questions:

Is the HFSA carryover amount included in determining the COBRA benefit amount?

Yes, the carryover amount, if any, is included in the available benefit amount for the rest of the plan year in which the qualifying event occurs.

Example: John's employer offers a calendar-year HFSA. He participated in the plan for 2015 and had an unused balance at the end of the year. John carried over $500 in unused contributions from 2015 into 2016 and also elected $2,500 for the 2016 plan year. He terminates employment June 30, 2016, after receiving $1,100 in claim reimbursements, and elects COBRA. Therefore John will have $1,900 of benefit available for the rest of the 2016 plan year, that is, $500 + $2,500 - $1,100 = $1,900.

Is the HFSA carryover amount included in determining the COBRA premium amount?

No, carryover amounts are disregarded in determining the applicable premium under COBRA.

See the example above. In John's case, the maximum monthly COBRA premium for the rest of 2016 is 102% of $1,400/12 (not $1,900/12). The $500 carryover is not included in determining the COBRA premium.

With respect to allowing participants to roll their unused HFSA contributions into another FSA or health savings account, Internal Revenue Code § 125 regulations governing HFSAs do not permit those disbursements, transfers, or rollovers. (Prior to 2007 there was a limited time when an HFSA participant had the option to roll over funds to his or her health savings account (HSA), but that is no longer the case.)

COBRA and employee medical leaves: The questions regarding how to manage benefits while an employee is unable to work because of disability can be difficult. COBRA rights are triggered when certain specified qualifying events cause a beneficiary to lose coverage under the group health plan. (State benefits continuation or workers compensation rules also may apply and should be considered.)

COBRA eligibility starts the day after coverage ends, which may be the day after the qualified event or a later date based on the terms of the plan or type of leave. If the employee is on a Family and Medical Leave Act (FMLA) leave, then termination of coverage generally would not occur until the FMLA leave period expires. FMLA allows covered employees up to 12 weeks of leave within a 12-month period. In the case of a work-related disability, the leave should be designated as FMLA leave and the triggering COBRA qualifying event would be subject to FMLA or state workers compensation rules. In workers compensation situations, the injured employee may be concerned that terminating health benefits and offering COBRA will mean that treatment for his or her work-related injury will end as well. Workers compensation coverage will continue to support the employee's medical needs as it relates to the industrial injury, and the termination of health benefits and COBRA offering relates to general health care for the employee and family.

Summing up

COBRA situations can be complicated and confusing. Work with your benefits advisors and legal counsel to ensure that the COBRA rules are applied correctly based on the specific features of your group health plans. IRS guidance and COBRA information from the Department of Labor can be helpful in addressing some of the challenges.

The author
Laura Kerekes is ThinkHR Corporation's Chief Knowledge Officer and leads the human resources service delivery, customer success and content teams. She earned bachelor's and master's degrees in business management along with postgraduate executive certification in human resources and holds the SPHR and SHRM-SCP HR certifications. She writes management, human resources and business articles and presents regularly to management groups regarding human resources best practices.