Employer A hires a number of new employees from Employer X. All of the new employees are covered under Employer B’s COBRA continuation coverage. May the new employees elect medical FSA under the 125 of Employer A, and submit for reimbursement the cost of the COBRA premium paid to Employer X? Could Employer A deduct (pre-tax) the cost of the COBRA premium directly from each of the new employees’ paychecks, and pay the COBRA premium directly to Employer X on behalf of the new employees? Note that there are also other employees without any connection to Employer X or the COBRA continuation option. Does the answer change if Employer A already has a group health plan for which the new employees are not yet eligible?

If it is a medical FSA insurance premium reimbursements are not allowable.

IRS publication 502 has useful guidance for list of "medical care" reimbursement.

It is a medical FSA - sorry I was not clear the first time. I know you are right, but do you have anything I can cite to? I am being told by someone whose title I should trust, but whose history I do not, that it is specifically stated in the 125 regs that this IS allowable. Of course, this person can't cite to anything, but also thought it was in pub 502.

I have used pub 502 many times in the past with general questions of including or excluding something from medical flex reimbursement; however, I cannot find anything that speaks directly to this specific issue. HELP!

Try looking at the actual Proposed Treas Regs that are use as guidance by most people in the industry:

http://www.irs.gov/pub/irs-utl/tres_reg-1125-2.pdf

I think that Q&A 7 should satisfy your need for direct addressing that premium should not be reimbursed through an FSA.

You might also want to search the old threads.

The deduction for health insurance premium on a pre-tax basis, whether for COBRA or otherwise, is not done through an FSA but through a section 125 Premium only Plan (POP). Eligibility, or lack of, re the existing health plan should not be an issue since these employees will not be participating in that health plan. However, check the eligibility requirements of the section 125 Cafeteria Plan. The health plan deals with coverage while the section 125 plan deals with pre-tax deductions. These employees do not need coverage (they already have through COBRA) they need pre-tax deductibility.