Employers offer various types of Flexible Spending Accounts (FSAs) to assist employees in covering medical expenses, child care, and dental and vision costs. If you have been taking advantage of these benefits while employed, you may be concerned about what happens to your FSA once you leave your job. Since most FSAs operate under a “use it or lose it” policy, it is crucial to understand the fate of your benefits in such a situation.
The Relationship Between Your FSA and Your Job
While you are the account holder of your FSA, you do not actually own it. Your employer does. This means that while you and possibly your employer contribute money to your account, the funds are available for your use during the plan year and your employment with that company. However, any unused funds are forfeited either at the end of the plan year or upon termination of your employment, whichever comes first.
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If you are still working for your employer at the end of the plan year and have remaining funds in your FSA, your employer may offer you a couple of options. They can provide a 2.5-month grace period for you to utilize the balance or allow you to roll over up to $500 into the next plan year. Taking advantage of these options will not affect your annual contribution limit for the following year.
Comments or Illustrative Examples: It is essential for employees to be aware of the terms and conditions surrounding their FSA when leaving a job. By understanding the options available, employees can make informed decisions to maximize their benefits before they are forfeited. For example, if an employee plans to leave their job at a specific date, they can strategically schedule medical procedures or stock up on eligible supplies to fully utilize their FSA funds.
What Happens to the Unused Money?
Any remaining funds in your FSA will be returned to your employer once you leave your job. If you have a healthcare FSA, you may have the option to continue accessing your funds through COBRA. However, it’s important to note that FSA contributions cannot be used to pay for health insurance premiums, whether through COBRA or the private market.
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Two important details to keep in mind regarding COBRA extended FSAs are:
- Contributions made during this period will be with after-tax money.
- An administration fee of 2% will be charged on all contributions.
Comments or Illustrative Examples: Employees should be mindful of the options available to them when it comes to using their FSA funds before leaving a job. If they anticipate quitting, it is advisable to plan ahead and spend the remaining balance on eligible expenses. For instance, individuals can consider purchasing a multiple months’ supply of prescription medications or stocking up on other qualified items to avoid losing the funds.
How the IRS Relaxed Rules During COVID-19
In response to the impact of the COVID-19 pandemic on the healthcare system, distribution channels, and other aspects, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This legislation directed the IRS to relax some rules around FSAs for 2021 and 2022. The new guidance grants employers greater flexibility in rollover amounts and grace periods, as well as the ability to reimburse prior year expenses beyond the usual tax deadline.
The new rules provide flexibility in the following areas:
- Carryover of unused amounts
- Extended period for incurring claims for specific plan years
- Special rule for post-termination reimbursements from health FSAs
- Claims period and carryover rule for dependent care assistance programs during the COVID-19 public health emergency
Employers are not obligated to offer this increased flexibility to their employees, but they have the option to do so.
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Comments or Illustrative Examples: The relaxed rules during the COVID-19 pandemic have provided employees and employers with additional options and leeway when it comes to FSAs. Employers who choose to implement these flexible measures can ease the transition for employees leaving their jobs and provide them with increased control over their FSA funds.
Consider an HSA if Eligible
A significant difference between FSAs and Health Savings Accounts (HSAs) is the ownership. With an HSA, you, as the account holder, own the funds instead of your employer. Additionally, HSA funds never expire, ensuring you always have access to your money. If you meet the following qualifications, you might want to consider opening an HSA:
- Aged between 18 and 65 years and not considered a dependent on someone else’s tax returns
- Maintain a High Deductible Health Plan (HDHP) as your only health insurance
- Not eligible for Medicare
Comments or Illustrative Examples: For individuals seeking a more long-term solution to healthcare and retirement savings, an HSA can be a valuable option. HSAs offer greater control and portability, allowing individuals to continue growing their funds even after leaving a job. Employees should explore the eligibility criteria and advantages of HSAs to determine if it is the right fit for their needs.
Get Started with Lively Today
If you are planning to leave your job soon, consider a Lively HSA to begin building your healthcare and retirement nest egg. You can bring your Lively HSA with you to your next job, provided you have a qualifying health plan. If you have any questions about how it works, do not hesitate to reach out to us.
Comments or Illustrative Examples: It is crucial for individuals to explore their options and make informed decisions when it comes to managing their healthcare funds. Lively HSA offers individuals the opportunity to take control of their healthcare savings and plan for their future, even during job transitions. By partnering with a reliable and reputable provider like Lively, individuals can ensure a smooth and seamless experience while managing their healthcare expenses.
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