IRS Issues Letter Concerning FSA Reimbursement After Termination

On June 25, 2021, the IRS responded to an inquiry from a congresswoman on behalf of her constituent who was concerned that the unused balance in her health FSA was forfeited when she was terminated from her employment because her health FSA was determined not to be eligible for COBRA. She asked for clarification of existing IRS guidance regarding health FSAs and the COBRA requirements (Letter 2021-0004).

In the letter, the IRS confirmed existing guidance and reiterated general information pertaining to COBRA and health FSAs. Specifically, it outlines the situation in which COBRA is triggered and, if triggered, how the COBRA premium for a health FSA should be determined in light of carryover amounts.

COBRA coverage for an FSA is triggered if a participant experiences a COBRA qualifying event (e.g. termination or reduction in hours) and as of the date of the qualifying event the amount the participant may receive from their health FSA for the rest of the plan year exceeds the amount the FSA may require to be paid for the COBRA for the rest of that plan year. The IRS confirmed that any carryover amount is included in determining the amount of the benefit that a qualified beneficiary is entitled to receive during the remainder of the plan year in which a qualifying event occurs.

The below section from the IRS Letter 2021-0004 provides additional information:

If COBRA is available, the amount the participant may be able to receive as a reimbursement for medical care following termination of employment is generally:

• The carryover amount plus the amount of the health FSA contribution elected for the plan year, minus
• The amount the plan has reimbursed the employee as of the date of the qualifying event.

The amount that a participant may be required to pay for COBRA continuation coverage for the rest of the year does not include the carryover amount and is:

• The amount of the health FSA contribution elected for the plan year, minus
• The amount contributed to the health FSA as of the date of the qualifying event.

Furthermore, IRS Notice 2015-87 provides some examples and additional guidance that may be helpful in understanding these rules. Similar to the IRS letter described above, this notice did not provide any new guidance. However, it provides helpful reminders of the applicability of COBRA on health FSA and a carryover.

IRS Letter 2021-0004 »
IRS Notice 2015-87 »