Flexible spending accounts allow employees to set aside a portion of earnings to pay for qualified medical, dental and dependent care expenses. The contributions are not subject to payroll taxes, which is a money-saving advantage. When you leave an employer, you may wonder what happens to the money in your account. If you spent all the funds before leaving the company, you are not required to pay back that money. On the other hand, if you have money left in the account, you may be forced to give up the funds.
Flex Account Ends When Employment Ends
When employment is terminated, regardless of the circumstances, you can no longer participate in the company's flexible-spending program, and money in the account cannot transfer to another employer. In some cases, the plan stops immediately upon termination of employment, forcing you to forfeit unused funds. With other plans, you may have until the month ends to spend the remaining funds in the account.
Continuation with COBRA
If an employer offers a continuation of health coverage through the Consolidated Omnibus Reconciliation Act of 1985, commonly known as COBRA, employees have 90 days after the date of termination to submit receipts for reimbursement. Another option is to extend your flexible-spending benefits through COBRA. If you leave your job, you can continue making your plan contributions, along with a 2 percent administrative charge, to keep the plan active until the end of the plan year or until the remaining balance is spent. This option is only available if you have a positive flexible-spending account balance. You are not required to purchase health care coverage through COBRA in order to continue flexible-spending account benefits.
Spending More Than You Contribute
With most flexible spending accounts, funds are available on the first day of the plan year. If you spend the entire balance and leave the company before contributing the total amount agreed, you aren't required to pay back the funds. As long as you are an employee at the time expenses are incurred and claims are submitted during the flex plan year, you are eligible for the full amount — not just the amount you contributed before parting ways. The employer can't deduct the difference from your paycheck or severance.
Unused Account Funds
Flex accounts follow the "use it or lose it" rule. If you don't spend the money in the account, you aren't reimbursed. Even if you remain employed and don't use all the funds, you forfeit the balance. Since contributions are deducted from your paycheck throughout the year, it's a good idea to spend the money early in the year. You can apply the funds towards a wide variety of medical expenses that your health insurance doesn't reimburse. Possible expenses include your deductible, copayments, dental work, prescription sunglasses, eyeglasses or contact lenses, laser eye surgery, chiropractic care and prescription drugs.
- The New York Times: Good Question - Flex Spend Funds After Job Loss
- Kiplinger: What Happens to Your FSA If You're Laid Off
- Health Equity: Flexible Spending Account (FSA)–Frequently Asked Questions
- IRS: Publication 969 - Flexible Spending Arrangements
- Society for Human Resource Management: COBRA - FSA: How Does COBRA Apply to Health Flexible Spending Arrangements?
- When Can You Withdraw Money From a Thrift Savings Plan (TSP) With No Penalty?
- Can I Pay for My Children's College With a Roth IRA?
- Are Cobra Payments Deductible for Income Tax Filing?
- What Is a Frozen Pension Plan?
- Can I Convert 401(k) to IRA Without Leaving Job?
- Laws & Penalties for Early Withdrawal From a 401(k) Account