IRS Information Letters 2021-0004 (Dec. 21, 2020) and 2021-0005 (Mar. 3, 2021)
Two recently released IRS information letters provide general information about the circumstances under which health FSA participants can continue to be reimbursed for eligible expenses after termination of employment. One letter explains that health FSA participants who terminate employment may be able to continue their participation by electing COBRA continuation coverage. However, health FSAs generally are not required to provide COBRA coverage unless, as of the date of the qualifying event, the amount the participant may receive as a reimbursement for medical care from the health FSA for the rest of the plan year (including any carryovers) exceeds the amount that the health FSA may require to be paid for the COBRA coverage for the rest of that plan year. If COBRA is available, the amount the participant may be able to receive as reimbursement for medical care following termination of employment is generally determined by subtracting the participant’s reimbursements as of the date of the qualifying event from the health FSA contribution amount elected for the plan year (increased by any carryovers). The amount that a participant may be required to pay for COBRA coverage for the rest of the plan year is equal to the participant’s health FSA contribution amount elected for the plan year minus the amount contributed to the health FSA as of the date of the qualifying event, and does not include carryovers.
The other letter explains that the use-or-lose rule generally restricts the ability to carry over unused amounts remaining in a health FSA at the end of a plan year to a subsequent year; these amounts cannot be returned to the employee and must be forfeited following any applicable grace period or claim run-out period. However, COVID-19-related relief allows employers to amend their plans to permit carryovers of unused health FSA amounts from the 2020 and 2021 plan years, extend the permissible period for incurring claims for plan years ending in 2020 and 2021, and allow certain post-termination reimbursements from health FSAs (see our Checkpoint article). Whether to amend a plan is solely in the employer’s discretion.
EBIA Comment: These IRS information letters were released along with several others that call attention to general cafeteria plan principles (see, for example, our Checkpoint article). While they do not break new ground or include any surprises, they may be helpful to those on the “front lines” of cafeteria plan administration, who are sometimes asked to explain the reasons for plan operating rules and decisions. The letters also serve as a reminder that health FSAs are not typical group health plans and can present special COBRA administration challenges. For more information, see EBIA’s Cafeteria Plans manual at Sections XXII.F (“General Rule Is That COBRA Applies to Health FSAs”), XIX.G (“The Use-or-Lose Rule and Its Exceptions”), and XVI.N (“Temporary COVID-19-Related Relief for Cafeteria Plans, Health FSAs, and DCAPs”). See also EBIA’s COBRA manual at Section XI (“When and How Does COBRA Apply to Health FSAs and HRAs?”).
Contributing Editors: EBIA Staff.