QUESTION: One of our employees just lost her coverage under our dental plan when she went from full-time to part-time. Can she pay her COBRA premiums on a pre-tax basis through our cafeteria plan?
ANSWER: Assuming she is still eligible to participate in the cafeteria plan as a part-time employee, your employee can pay COBRA premiums on a pre-tax basis. An employee who goes from full-time to part-time and consequently is dropped from group health plan coverage that is available only to full-time employees has experienced the COBRA qualifying event of reduction of hours. The 2007 proposed cafeteria plan regulations provide that COBRA premiums under an accident or health plan of the employer sponsoring the cafeteria plan are a qualified benefit that may be offered under the cafeteria plan (so long as the premiums are excludable from income under Code § 106). Furthermore, the permitted election change regulations authorize cafeteria plans to allow employees to make midyear election changes to pay for COBRA coverage under their employers’ plans when there is a COBRA qualifying event (increasing or initiating salary reductions to pay for the cost as necessary). Thus, your employee could pay her COBRA premiums (and those of her spouse and dependent children if, if applicable) under your company’s dental plan through the cafeteria plan, so long as part-time employees are eligible to participate in the cafeteria plan. Note that a plan amendment may be needed—for instance, to provide for pre-tax payment of COBRA premiums or midyear election changes on account of a COBRA qualifying event.
Keep in mind that there are other circumstances under which it may not be permissible for employees to pay for COBRA coverage on a pre-tax basis. For example, COBRA coverage for a former spouse cannot be paid for on a pre-tax basis under a cafeteria plan because a former spouse will not qualify as the employee’s spouse or tax dependent for health coverage purposes.
For more information, see EBIA’s COBRA manual at Section XXII.H (“COBRA Premiums and Cafeteria Plan Issues”) and EBIA’s Cafeteria Plans manual at Sections X.G (“Should a Cafeteria Plan Permit Participants to Pay for COBRA Coverage on a Pre-Tax Basis?”) and XIV.L (“When May Participant Elections Be Changed? COBRA Qualifying Events”). You may also be interested in our upcoming webinar, “Another COBRA Subsidy! Compliance Steps to Take Immediately” (live on 4/7/2021).
Contributing Editors: EBIA Staff.