Employers offer different types of Flexible Spending Accounts (FSAs) to help employees pay for medical expenses, child care, and dental and vision costs. And if you’ve been enjoying these benefits while employed, you might be worried about what happens to them once you leave your job. While FSAs operate on a “use it or lose it” policy in most cases, there are ways you can maintain your benefits while you’re looking for work or even when you start at a new company.
The relationship between your FSA and your job
Although you are the account holder of your FSA, you don’t actually own it. Your employer does. That means that while you (and perhaps your employer) deposit money into your account, that money is yours to use during the plan year and while you’re employed at that company. But anything you don’t use is forfeited either at the end of the plan year or termination of your employment (whichever comes first).
If you’re still working for your employer at the end of your plan year and you have money left over in your FSA, your employer has the option to offer you either a 2.5 month grace period in which to use your balance or the ability to rollover up to $500 into the next plan year. If your employer offers either of these options and you take advantage of them, it won’t affect your annual contribution limit for the following year.
What happens to the unused money?
Any unused money in your FSA goes back to your employer once you leave your job. If you have a healthcare FSA, you could have the option to continue access to your funds through COBRA. But you can’t use your FSA contributions to pay for health insurance premiums either through COBRA or in the private market.
Two other important details of COBRA extended FSAs are:
- Any contributions you make will be with after-tax money.
- You will be assessed a 2% administration fee on all contributions.
Can you plan to use your FSA money before you quit?
If you have a date in mind that you plan to leave your job, you can make sure you use your remaining FSA funds before you do so. Even if you give two weeks’ notice, some employers will ask that the day you quit be your last day at work (depending on the nature of your job). So it’s best to plan to use your FSA money before you actually give notice.
Here are some ways to put your account to good use before you lose it:
- Schedule an elective procedure you’ve been putting off either for you or for one of your dependents. Just keep in mind you can’t use your FSA to pay for something in the future, so the costs will need to be incurred prior to quitting.
- Stock up on first aid and other eligible supplies, like sunscreen.
- If you take birth control or another prescription regularly, ask your doctor about the possibility of buying multiple months’ supply at once.
How the IRS relaxed rules during Covid-19
Since Covid-19 disrupted the health system, distribution channels and just about everything else, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 which directed the IRS to relax some of its rules around FSAs for 2021 and 2022. The new guidance gives employers greater flexibility in how much they can allow their employees to rollover and how long of a grace period they can provide. Employers can also allow account holders to submit prior year expenses for reimbursement beyond the normal “Tax Day” deadline.
Here are the areas of flexibility the new rules provide:
- Flexibility for the carryover of unused amounts;
- Flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
- Flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs; and
- Flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency.
Employers don’t have to offer employees this increased flexibility in using their FSA money, but they have the option to do so.
Move your FSA balance to an HSA
One of the major differences between FSAs and Health Savings Accounts (HSAs) is that you, as the account holder, own your HSA instead of your employer. And you always have access to your money. So, if you have both an FSA and an HSA and you are planning to quit, you should consider moving your FSA balance into your HSA.
Anyone who holds both accounts can make a one-time, tax-free transfer of FSA funds to their HSA, as long as they maintain HSA eligibility for the year following the transfer. To be eligible to contribute to an HSA you must:
- Be 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; and
- Not eligible for Medicare.
Get started with Lively today
If you’re planning to leave your job in the near future, a Lively HSA can help you preserve your FSA balance. By making a one-time transfer into your HSA, you can invest money you might have otherwise forfeited, or spent on items you really didn’t need, and begin to grow your healthcare and retirement nest egg.
Have questions about how it works? Reach out to us today!
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.