Your Flexible Spending Account (FSA) After Job Loss

Use Your FSA Funds Before You Leave Your Job

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Do you have a flexible spending account that reimburses you for medical expenses like your health insurance deductible, copays, and coinsurance? Are you about to get laid off, quit your job, or retire? Knowing what will happen to your flexible spending account when you lose your job will help you make smart choices.

Your Flexible Spending Account Is Linked to Your Job

Your ability to use your FSA is linked to your job. However, if you're eligible for COBRA continuation coverage of your FSA, you may be able to continue using your FSA even after you lose or quit your job.

If COBRA extension of your FSA is available, it's important to remember that your former employer will not be matching FSA contributions on your behalf, even if they did so when you were employed. Instead, you'll be making those contributions with after-tax money, plus a 2 percent administrative fee.

So there is no ongoing tax advantage to electing COBRA for an FSA, other than the ability to request reimbursement for funds that were still remaining in the FSA when the job loss occurred.

What Happens to the Money in My FSA When My Job Ends?

Money left unused in your FSA goes to your employer after you quit or lose your job unless you are eligible for and choose COBRA continuation coverage of your FSA.

Even if you're able to continue your FSA with COBRA, your FSA money can't be used to pay for monthly COBRA health insurance premiums, nor can it be used for non-COBRA health insurance premiums such as those offered through each state's health insurance exchange.

If you're not eligible to continue your FSA via COBRA, you'll want to try to use up the money in your Flexible Spending Account before your job ends so you don’t lose the money.

How to Use Up Your FSA Money and Even Come Out Ahead

Let's say you're leaving your job in March, and you want to use up your FSA. The good news is that it may be possible to take more money out of your FSA than you put into it. How? Your FSA will pay for eligible medical expenses up to the amount you committed to contributing for the entire year, even if you haven’t contributed that much yet.

[For reference, the IRS caps the amount that employees can contribute to their FSAs each year, and employers can impose lower caps if they choose to do so. In 2019, the maximum amount that the IRS will allow employees to contribute to an FSA is $2,700. Employees can choose to contribute up to the maximum amount allowed under their plan, but they have to establish their contribution amount prior to the start of the plan year and can't change it during the year unless they have a qualifying event.]

Let’s say you agreed to contribute $2,000 over the course of the year. By February, you’ve contributed about $333 when you break your wrist. Your FSA will reimburse you for the entire $2,000 you promised to contribute that year, even though you’ve only made $333 in FSA contributions so far.

If you then quit your job or get laid off in early March, you don’t have to pay the $1,667 difference back. It doesn’t even count as taxable income.

What happens with the $1,667 you were supposed to contribute but didn’t? Your employer takes a $1,667 financial hit for it. But, don't feel too guilty. These employer costs are offset by the unused funds forfeited to the employer by other employees at the end of the year.

[Depending on the employer's rules, up to $500 can be carried over to the next year in an FSA, or your employer can allow employees an extra two and a half months after the end of the year to use up remaining FSA funds—but other than those exceptions, FSA funds remaining in the account are forfeited each year. President Trump issued an executive order in mid-2019 that directs the Secretary of the Treasury to issue regulations that would allow employees to carry over a larger amount of FSA funds from one year to the next. The specifics won't be available until the regulations are issued, but it's likely that the FSA carryover amount could be increased by 2020. It's important to understand, however, that the current carryover rule is optional for employers; some offer it and some do not.]

If you're not sick, no worries. There are a variety of ways to use up your FSA money quickly. Here are some possibilities:

  • Get a checkup—or several. Be sure you're up to date on your annual physical, and check in with other doctors who oversee any treatment you're receiving. Under the ACA, there's no cost for a wide array of preventive care (as long as your plan isn't grandfathered), but there are additional services that can be provided during a wellness visit that will incur charges.
  • Buy new glasses. Now is a great time to have your eyes checked and to buy yourself as many pairs of glasses (or contacts) as you think you'll need for the near future. And don't forget sunglasses! As long as the sunglasses include your vision correction prescription, you can use FSA funds to buy them.
  • Restock your personal care cabinet. A lot of the items for sale on the shelves in your local drugstore can be purchased with FSA funds. But there are rules you need to understand, and it's not always intuitive. For example, incontinence pads can be purchased with FSA funds, and so can a heat wrap to alleviate menstrual cramps—but products like tampons and menstrual pads cannot. FSA Store has a search tool where you can enter the type of product you need and it will let you know whether you can use FSA money to buy it. There's a very wide range of FSA-eligible products that we all use on a regular basis, and that can be stockpiled if you're needing to use up FSA funds. Things like bandages, thermometers, shoe inserts, condoms, pregnancy tests, and sunscreen can all be purchased with money that's sitting in your FSA—definitely a better option than just forfeiting the money.
  • Get a prescription for over-the-counter medication and restock that too. Over the counter medications can generally only be purchased with FSA funds if you have a prescription for them (insulin is an exception to this rule). But if your doctor writes you a prescription for OTC meds, you can buy them with FSA funds. So consider discussing this with your doctor if you know you're going to need certain OTC drugs and you have money in your FSA that needs to be used up before you leave your job.
  • Treat yourself to mental health therapy. People often find themselves wanting to see a mental health therapist, but unable to find one that accepts their health insurance. But you can use FSA money to pay for mental health care, as long as it's considered medically necessary (ie, it's to treat a mental health problem, rather than for general wellness). So if you've been wanting to see a therapist and you've got money to burn in your FSA, you could use your FSA funds to pay the therapist. Depending on the circumstances, you might need to obtain a letter of medical necessity in order to use your FSA funds, so make sure you ask questions and understand what's needed before you count on your FSA funds for therapy. 
  • Get any elective treatments. Were you considering any type of surgical or other medical treatment but putting it off for a more convenient time? Now is the time! Depending on your plan, you may be able to use the money in your FSA to pay for medically necessary treatments like acupuncture and chiropractic care. 

FSAs Unchanged by Tax Cuts and Jobs Act

In December 2017, Republican lawmakers passed H.R.1, dubbed the Tax Cuts and Jobs Act. The legislation did not make any changes to the rules regarding FSAs. An earlier draft of the House's version of H.R.1 would have eliminated dependent care FSAs, which allow workers to save up to $5,000 annually in an FSA designated for child care expenses. But the House amended the bill in November 2017 so that dependent care FSAs would not be eliminated.

Dependent care FSAs are different from medical FSAs, but both remain intact under the GOP tax reform bill.

With an HSA, You Can Take It With You When You Go

If your employer offers an HSA-qualified high deductible health plan (HDHP) and you enroll in it, you'll have the option to put money into a health savings account (HSA). An HSA lets you save pre-tax money to pay for medical expenses, just like an FSA. But the tax advantages of an HSA are much stronger than those of an FSA.

There are numerous differences between FSAs and HSAs, despite the fact that they're both a tax-advantaged way of paying for medical expenses. If you have an HSA and you leave your job, the money goes with you. That's true even if the money in your HSA was deposited by your employer on your behalf (as opposed to your own contributions). And there's no "use it or lose it" rule with HSAs, so if you haven't needed to use your HSA funds for medical expenses and you (and/or your employer) have been contributing money to the HSA for several years, you could have a good stash of savings in the account.

When you leave your job, all of that money is still yours. If you switch to a new HDHP (or keep your existing HDHP via COBRA), you can continue to put money into your HSA. If you switch to a new health insurance plan that isn't an HDHP (for example, maybe your new employer only offers a health plan that isn't HSA-qualified), you can't contribute any more money to your HSA (until if and when you have HDHP coverage again), but you can continue to withdraw money from the HSA to cover your out-of-pocket medical expenses under your new plan.

If you have an HSA, you don't need to scramble to use up the money in the account when you're planning to leave your job—or at the end of each year.

One more area where an HSA trumps an FSA is that if you have money in your HSA when you leave your job, you can use your HSA funds to pay for COBRA premiums or health insurance premiums paid while you're receiving unemployment benefits. FSA funds can never be used to pay any sort of health insurance premiums, regardless of the situation.

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