Terminated Employees and Flexible Spending Accounts
It’s the middle of the plan year, and an employee who is enrolled in the company’s flexible spending account (FSA) decides they are going to leave and go work for another employer. When they are no longer an employee, what happens to the FSA?
Once the person is no longer an active employee, they are no longer active in the FSA. Unlike many insurance plans, coverage does not go to the end of the month in which the employee termed. Their last day in the plan is the last day they were an employee. Most plans are designed to allow a length of time after the termination date to submit claims for reimbursement (30, 60 or 90 days are common) but the dates of service have to be on or before the termination date in order to be eligible for reimbursement. If there are claims on the account with dates of service after the term date, these funds have to be repaid to the plan since the claims are not eligible for reimbursement. Additionally, if there is a flex card provided by the plan, it should be deactivated once the employee terms.
The exception to this is when a former employee is eligible for and elects COBRA coverage for the FSA. By electing COBRA, they will remain active in the benefit and can continue to use the funds in the account for dates of service incurred after their term date.
With the FSA, the entire available balance is available at the start of the plan year even though the employee has not made all the payroll contributions. If an employee has been reimbursed more than they have contributed, they do not have to repay the funds when they terminate as long as the funds were used on eligible expenses. Any funds remaining in the account after all eligible claims have been paid are forfeit.
There are many details to remember when an employee terminates, and the FSA is no exception. Communicating plan details and deadlines when an employee terminates can help avoid confusion for both employees and employers.
BusinessPlans, Inc. – myCafeteriaPlan does not intend to provide legal or tax advice and information contained in this article should not be interpreted as such. Regulations governing pretax plans are often open to interpretation and should be reviewed with your legal or tax advisor before making any decisions regarding your plan.