Q&A Cafeteria Plans

October 28, 2008

Which individuals cannot participate in a cafeteria plan?

Self-employed individuals, partners in a partnership and more than 2% shareholders in an S corporation cannot participate in a cafeteria plan as provided in Proposed Treasury Regulations Sections 1.125-1(g)(2)(i) and (g)(2)(ii).

In what situations can a participant changes his or her election under a Health FSA during a plan year?

Treasury Regulations Section 1.125-4 provides that there are only six situations in which participants may be allowed to change his or her election during the plan year under a Health FSA. These include:

  • Change in Status,
  • FMLA,
  • Medicare,
  • QMCSO.
  • HIPAA Special enrollment situations, and
  • COBRA.

Can an employer use a last check to reimburse unpaid amounts during a Plan Year after an employee terminates employment under a Health Flexible Spending Accounts (Health FSA)?

No, an employer may only withdraw those amounts that the employee has elected. This is provided In IRS information Letter-, dated July 9, 1998.

Are Health Flexible Spending Accounts (“Health FSAs”) subject to the privacy requirements of Health Insurance Portability and Accountability Act of 1996 (HIPAA)?

Yes, Health FSAs must comply  as provided in HHS Frequently Asked Questions (“Is a flexible spending account or a cafeteria plan a covered entity?”), available at http://healthprivacy.answers.hhs.gov

There are exceptions for those Health FSA Plans that have under 50 participants and are self-administered. As provided in Social Security Act Section 1171(5)(A).  Health FSA Plans must comply separately from insured health Plans.

Before a participant can be reimbursed for an expense under a Health FSA, must the participant pay for the expense?

No. It is only required that the participant incurred the expense to be reimbursed as provided under Proposed Treasury. Regulations Section 1.125-6(b)(4).  There is no requirement that a plan participant actually pay for a service before reimbursement can be made under a health FSA. Requiring payment as a condition to reimbursement may violate the monthly reimbursement requirement

Must a participant in a Health Flexible Spending Accounts (Health FSA) be offered Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) upon termination of employment during the year?

Yes. A Health FSA that is subject to COBRA must offer COBRA continuation rights to qualified beneficiaries who lose health FSA coverage as a result of qualifying events, and must provide COBRA notices, including the initial COBRA notice. However, if the health FSA meets certain conditions prescribed in the Treasury Regulations Section 54.4980B-2, Q/A-8(b), the obligation to offer COBRA is limited.

This limited COBRA obligation can be summarized as follows:

  • first, COBRA does not need to be offered to qualified beneficiaries who have overspent their accounts as of the date of the qualifying event; and
  • second, for those who have underspent their accounts, COBRA must be offered but can be cut off at the end of the year in which the qualifying event occurs