Can a Depentent Continue Fsa Under Cobra
Do you have a medical flexible spending account (FSA) 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?
This article will explain what will happen to your flexible spending account when you leave your job, and what steps you can take to maximize your FSA benefit.
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Your FSA 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% 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.
Money in FSA When 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.
Using up FSA Money and Even More
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. The IRS caps the amount that employees can contribute to their FSAs each year (for 2022, the cap is $2,850), and employers can impose lower caps if they choose to do so.
Employees can choose to contribute up to the maximum amount allowed under their plan, but they have to establish their contribution amount prior to the start of the plan year and can't change it during the year unless they have a qualifying event.
2020-2022 COVID-19 Modified Rules
For 2020 and 2021 (and in some cases, 2022), the IRS has relaxed these rules to address the COVID-19 pandemic:
- Employers are allowed (but not required) to give employees the option to start, stop, or change their FSA contribution amounts mid-year, without a qualifying event (this initially only applied to plan changes in 2020, but the appropriations bill that was enacted in late 2020 extended this provision to 2021 plan years as well). The normal rules, which require a qualifying event to make mid-year FSA changes, are back in effect as of 2022.
- The IRS allowed employers to extend grace periods or plan years that were scheduled to end at some point in 2020, giving employees until the end of 2020 to use remaining FSA funds. For plan years that ended in 2020, unused amounts could be carried over to 2021, with no limit on the carryover amount. And for plan years that ended in 2021, unused amounts could be carried over to 2022, with no limit on the carryover amount. This flexibility was optional for employers, and they were not required to offer it.
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 (assuming you have that much in documented out-of-pocket medical costs), 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.
Depending on the employer's rules, up to $570 can be carried over to the next year in an FSA, or your employer can allow employees an extra two and a half months after the end of the year to use up remaining FSA funds—but other than those exceptions, FSA funds remaining in the account are forfeited each year.
(As noted above, there were COVID-related exceptions to these limits for plan years that ended in 2020 and 2021, allowing unlimited funds to be carried over to use in 2021 and/or 2022, if the employer chose to offer this flexibility.)
Ways to Use FSA Funds
If you're not sick, no worries. There are a variety of ways to use up your FSA money quickly. Here are some possibilities that will help you avoid forfeiting the money that's left in your FSA when you leave your job.
Get Checkups
Get a checkup—or several. Be sure you're up to date on your annual physical, and check in with other healthcare providers 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. You can use your FSA funds to cover these out-of-pocket costs.
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. And don't forget sunglasses! As long as the sunglasses include your vision correction prescription, you can use FSA funds to buy them.
Restock Medicine and Personal Care Items
A lot of the items for sale on the shelves in your local drugstore can be purchased with FSA funds. And thanks to the CARES Act that was enacted in 2020, this list is expanded to include non-prescription and certain personal care items.
OTC and Menstrual Products Now FSA-Eligible
Rules implemented in 2020 as a result of the COVID-19 pandemic have expanded the list of FSA-eligible products. Over-the-counter medications and menstrual products can now be purchased with FSA funds. This rule change is permanent. It's not just for the duration of the COVID-19 emergency period, and it was also made retroactive to the start of 2020.
Before the CARES Act, over-the-counter medications could only be purchased with FSA funds if your healthcare provider wrote a prescription for the medication, but that's no longer the case.
FSA Store has a search tool where you can enter the type of product you need and it will let you know whether you can use FSA money to buy it. There's a very wide range of FSA-eligible products that we all use on a regular basis, and that can be stockpiled if you're needing to use up FSA funds.
Things like bandages, thermometers, shoe inserts, condoms, pregnancy tests, sunscreen, tampons, and menstrual pads, as well as over-the-counter medication, can all be purchased with money that's sitting in your FSA—definitely a better option than just forfeiting the money.
Mental Health Therapy
People often find themselves wanting to see a mental health therapist, but unable to find one that accepts their health insurance. But you can use FSA money to pay for mental health care, as long as it's considered medically necessary (ie, it's to treat a mental health problem, rather than for general wellness).
Depending on the circumstances, you might need to obtain a letter of medical necessity in order to use your FSA funds, so make sure you ask questions and understand what's needed before you count on your FSA funds for therapy.
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. Depending on your plan, you may be able to use the money in your FSA to pay for medically necessary treatments like acupuncture and chiropractic care.
You Can Take an HSA With You
If your employer offers an HSA-qualified high deductible health plan (HDHP) and you enroll in it, you'll have the option to put money into a health savings account (HSA).
An HSA lets you save pre-tax money to pay for medical expenses, just like an FSA. But the tax advantages of an HSA are much stronger than those of an FSA. There are numerous differences between FSAs and HSAs, despite the fact that they're both a tax-advantaged way of paying for medical expenses.
If you have an HSA and you leave your job, the money goes with you. That's true even if the money in your HSA was deposited by your employer on your behalf (as opposed to your own contributions).
And there's no "use it or lose it" rule with HSAs, so if you haven't needed to use your HSA funds for medical expenses and you (and/or your employer) have been contributing money to the HSA for several years, you could have a good stash of savings in the account.
When you leave your job, all of that money is still yours. If you switch to a new HDHP (or keep your existing HDHP via COBRA), you can continue to put money into your HSA.
If you switch to a new health insurance plan that isn't an HDHP (maybe your new employer only offers a health plan that isn't HSA-qualified), you can't contribute any more money to your HSA (until you have HDHP coverage again). But you can continue to withdraw money from the HSA to cover your out-of-pocket medical expenses under your new plan.
Summary
If a person with an FSA leaves their job, any money remaining in their FSA is forfeited to the employer. But there are various purchases that can be made to use up FSA funds. And depending on the circumstances, it may also be possible to extend the FSA with COBRA (contributions will then be made on an after-tax basis) in order to have extra time to use up the remaining FSA funds.
On the other hand, a person who has already spent all of their FSA funds for the year can leave their job without having fully funded the FSA, and there are no negative repercussions. The FSA funds do not have to be repaid in that case.
A Word From Verywell
If you're going to be leaving your job mid-year and you have an FSA, you'll want to try to manage your FSA funds so that you don't end up forfeiting a significant amount of money. You can buy various medical supplies with your FSA funds in order to use them up, and you may also have the option to extend your FSA with COBRA, giving yourself more time to use your remaining FSA funds.
If you have an HSA, you don't need to scramble to use up the money in the account when you're planning to leave your job—or at the end of each year.
Another benefit of an HSA over an FSA is that if you have money in your HSA when you leave your job, you can use HSA funds to pay for COBRA premiums or health insurance premiums paid while you're receiving unemployment beneits. FSA funds can never be used to pay any sort of health insurance premiums, regardless of the situation.
Source: https://www.verywellhealth.com/how-does-job-loss-affect-your-flexible-spending-account-1738823
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