Immediate Reliance
Although the proposed regulations described in this article are not final, the IRS states that it will accept compliance with them as good faith compliance with COBRA. While this protects employers from the IRS, courts may not give the usual deference to proposed regulations in suits by private individuals. You should consider this in close cases.
Small Employer Exemption -- Counting Part-Time Employees
The proposed regulations change the way in which employers determine whether they have fewer than 20 employees on more than 50% of their typical business days in a calendar year. Employers may count part-time employees as fractions, so it is possible, for example, to have 19-7/8 employees and escape COBRA obligations.
To compute the fraction associated with a part-time employee, divide the weekly hours worked by the part-time employee by the number of hours which the employer requires for full-time status, but not more than 40.
Instead of calculating the number of employees on each business day, the proposed regulations also permit the calculation to be made for each payroll period.
Separate Plans for Separate Benefits
The proposed regulations say that the plan documents will govern in determining whether separate plans exist for different health care benefits subject to COBRA. Thus, employers may document prescription drug, dental and vision benefits as separate plans, for example. This would permit COBRA beneficiaries to separately elect or reject coverage under each plan rather than requiring an all or nothing election. The employer benefits by reducing COBRA elections under the peripheral benefit plans.
COBRA and Health Care Flexible Spending Accounts
Until now, employers were uniformly required to offer COBRA coverage under health care flexible spending accounts ("FSAs") in cafeteria plans. Generally, employees may contribute to FSAs maintained by their employers through payroll deductions. Some employers also contribute either on a matching basis or through outright grants. An employee may then present uninsured medical bills to the FSA administrator for payment from the employee's account. Because contributions to an FSA are not included in the employee's taxable income, the employee saves the amount of income taxes which would have been paid on the amount of money needed to pay the medical expenses.
If an employee elects COBRA coverage under an FSA he or she must pay the premium which cannot be more than 102% of the employee's payroll deduction contribution plus the employer's contributions, if any. Moreover, since the premium cannot be paid by payroll deduction if the participant is no longer employed by the FSA sponsor, the employee experiences no income tax savings.
While it might appear at first glance that it makes no economic sense to elect COBRA coverage under an FSA, this is not always the case. If an employee terminates employment without having incurred reimbursable medical expenses in at least the amount of the FSA account balance, then the employee would lose the remaining balance if he or she were not able to continue the coverage through COBRA. In that case it makes sense for the participant to pay the COBRA premiums so that the unspent FSA account balance is not lost.
On the other hand, COBRA coverage under an FSA presents a risk to the employer. By law the FSA must pay any reimbursable medical expense presented up to the total amount available from the FSA for the entire year, even if the demand for reimbursement exceeds the contributions to the account at that time. This creates an incentive for an FSA participant to elect COBRA, present reimbursable bills for the total remaining FSA liability, and then cease paying the COBRA premium leaving the employer with an uncollectible loss.
The proposed regulations reduce employers' risks by curtailing the circumstances under which an employer must offer COBRA coverage to FSA participants.
In order to qualify for the exemption from COBRA under the proposed regulation, an FSA must first be an excepted benefit under HIPAA which is the case if the employer offers other major medical coverage in addition to the FSA, and the maximum benefit under the FSA does not exceed two times the employee elective contribution.
The COBRA exemption under the proposed regulation comes in two parts. COBRA coverage need not be offered under an FSA for the next plan year after the COBRA event if the premium chargeable for the COBRA coverage exceeds the maximum FSA benefit. This will nearly always be the case, since the maximum premium chargeable is 102% of the contributions to the FSA.
In addition, COBRA coverage need not be offered for the balance of the plan year in which the COBRA event occurs if the maximum benefit available under the FSA for the balance of the plan year is less than the maximum COBRA premium which the employer can charge for the balance of the plan year. The application of this part of the COBRA exemption will depend upon how much of the balance of the FSA has been spent at the time of the COBRA event compared to the prorated COBRA premium chargeable over the balance of the plan year.
We will conduct a workshop on the COBRA exemption for FSAs under these proposed regulations at the Annual Employment Law Update. (See the registration reminder at page 6.)