How FSA Carryover Works with COBRA

It was very exciting when the IRS allowed the adoption of the Carryover Rule a few years back. The new rule stated that FSA plans may elect to offer a carryover of up to $500 of unused balances. As a result, participants with the Carryover Rule on their plan are less likely to forfeit funds under the ‘use it or lose it’ rule. Due to the added convenience and reduced risk, many employers have adopted this rule.

Calculating COBRA Premiums
In order for a Flexible Spending Account to be eligible for COBRA continuation, there must be a positive balance at the time the employee experiences the qualifying event. For instance, if an employee has contributed $500 of a $1,000 annual election and has spent $800 at the time of termination, the account balance is -$300 and is not COBRA eligible. If that same employee has spent only $200, the account balance is $300 and therefore, becomes eligible for COBRA benefits.

The monthly payment to continue the FSA is calculated by determining the monthly administrative fee and the monthly premium. The monthly administrative fee is calculated by taking 2% of the annual election amount and dividing it by the number of months remaining in the plan year. Using the example above and assuming that there are 6 months left in the plan year, the monthly administrative fee would be $3.33. ($1,000 X 2%, then divided by 6). The monthly premium is the remaining contributions divided by the months remaining in the plan year. (Remember to take into account employer contributions, if applicable.)

COBRA and the Carryover
Now let’s say the same participant has $500 left at the end of the plan year.  The COBRA participant is not eligible to elect additional FSA money for the following plan year, but they may continue to carry over their balance until the end of their COBRA coverage period. Since there is not election for the following plan year and the carryover balance was completely funded during the previous plan year, a premium cannot be calculated. As a result, there is nothing due on the participant’s behalf in order to continue their carryover benefit.