I think I opened a can of worms with the IRS last week.

Background:

The IRS allows 2.5 months (75 days) after the end of the plan year. But does this apply to the terminated employees? Yes (or could if the employer elects).

Scenario:

If an employee terminates after 6 months into the plan year, AND if the employer has elected the 2.5 month extension for terminated employees, the employee can submit claims for old (previous plan while employed) and 2.5 months for new claims (after employment).

If a group has elected the 2.5 month rule, can the terminated employees also engage the 75 days at termination?

Harry, my logic is: The plan year has a grace period of 90 days after the end of plan year for all employees. Once an employee terminates, they are offered COBRA (if money is left in account) and has the same 90 days to recoup their funds as the active employees. Thus, the end of the plan year for the employee is the date of termination. Therefore, they should be treated as similarly situated as the rest of the employees. These terminated employees should or must be allowed the 2.5 month extension. (Hoping it is an elected benefit by the employer) I think my logic is bullet proof. What do you say, Sir?

Harry Beker, Chief Counsel of IRS response:

I'm not sure about "bullet proof'" but I agree with your analysis.

Follow up question:

Can the employer elect to offer or not to offer the 75 day extension?

Harry: Whether there is a grace period is elected by the employer; who can participate is not.

Conclusion:

The issue now is whether current software in the marketplace can handle this election? I personally think this is great for terminated employees but, has risks to employers. More analysis and debate needed...