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.

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 (up to $500 can be carried over to the next year in an FSA, but funds remaining beyond that level are forfeited).

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.
  • 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!

    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.

    Sources: H.R.1 — An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Enacted 12/22/2017.

    FSA Feds. Dependent Care FSA.

    Internal Revenue Service, Notice 2013-71.

    Internal Revenue Service, Notice 2015-87.