FSAs and COBRA: What to know about rules and eligibility

"I was fired before the end of my FSA plan year. What happens to remaining FSA funds? Is an FSA a COBRA eligible plan?"

Whether you are fired, laid off or leave a job for another reason, the question of what happens to your flexible spending account (FSA) funds is a big one, and it's something that all employers may handle differently. If you are enrolled in an FSA, developing a strategy for a future job transition should always be something you have in the back of your mind so you can avoid forfeiting any funds.

Even if you are fired before the end of your FSA plan year, some employers give you the chance to use the remaining funds in a specific time period. You will not be able to incur new expenses during this period unless you are eligible for and elect COBRA. COBRA (or the Consolidated Omnibus Budget Reconciliation Act) lets you continue group health coverage for a limited time.

COBRA FSA rules can be complicated, as you can only elect COBRA under certain conditions. Let's dive into the FSA COBRA question so you can quickly develop a plan during a job transition:

If your employer is subject to COBRA (your company has 20 or more employees)

If your FSA is "underspent." What this means is that you've spent less than you've contributed to your FSA to date. If you spent more than you've contributed to date ("overspent"), then you wouldn't be entitled to COBRA.

How does it work?

Once you've elected COBRA coverage, you'll continue to make contributions to your FSA on a taxable basis and your entire FSA balance will be available for you to use on FSA eligible expenses. Your employer may charge up to 102% of the cost to administer the FSA, so you may pay your salary contribution on a taxable basis, plus the FSA admin fee and an additional 2% COBRA admin fee.

Example:

Joe elects $2,400 to his FSA, and then terminates employment on June 30. He had contributed $1,200 ($200 per month) when terminated and hadn't used any of his balance. If Joe is entitled to and elects COBRA, he would continue paying $200 per month, plus if applicable, the FSA admin fee and an additional 2% COBRA admin fee, which would be his total COBRA premium. Joe would have access to the full $2,400 while on COBRA and could terminate COBRA coverage at any time.

To avoid forfeiting funds, easily spend down by shopping for FSA-eligible products at FSAstore.com.

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