Employee Benefits | FJG/FYI Articles
Benefits Compliance FAQ
Question: Can a terminated employee
have COBRA premiums deducted from a
final paycheck on a pre-tax basis?
Answer: Yes, the employee may be able to have some of his COBRA premiums deducted from his final paycheck, if the employer’s policies and documents allow.
Additionally, if the employer sponsors a Section 125 Plan (and the plan document allows), the COBRA premiums may be run though the 125 Plan, and thus deducted pre-tax from the last paycheck.
It is very important to note that the COBRA premiums can only be deducted for coverage within the same plan year, and not for the entire eligible COBRA period (i.e., 18 months). If premiums were deducted on a pre-tax basis for a different plan year, the Section 125 deferred compensation rules would be violated, the deduction disallowed and penalties may be assessed. (Prop. Treas. Reg. 1.125-2, Q/A 5).
As with all policies, this one must be documented in the employer’s handbook, plan documents, personnel policies and COBRA communications; and must be offered consistently to all terminated employees and COBRAqualified beneficiaries. If the policy is not currently in force, most documents may be amended to include such policy.