Q. - An employee did not elect to participate in the FSA this year, but he has a carryover amount from a prior year. He is terminating employment tomorrow. Does he get to keep his carryover amount? Should he be given the opportunity to continue FSA participation under COBRA?
A. - The IRS has not provided direct guidance on this issue. The general rule for FSAs and COBRA is that COBRA has to be offered only if year to date contributions are greater than year to date reimbursements. Since in this example, there are $0 contributions, the COBRA rules would indicate that COBRA does not have to be offered for a carryover amount, only. Any carryover amount in this circumstance would be forfeited upon termination of employment.
If the individual was making FSA contributions in the year of termination and those contributions were greater than reimbursements at the time of the COBRA qualifying event, COBRA should be offered and the COBRA amount would include the $500 carryover.