Flexible Spending Account changes in employment

Basics

Some employers offer a Flexible Spending Account (FSA), which lets you to put aside pre-tax funds to cover qualified health care expenses. FSA money is available to you on day one of your FSA plan year. However, you might be curious about what happens if you leave your employer before your FSA plan year ends.

What happens to the FSA plan and what do you need to do? Below are a few possible scenarios.

Leaving employment before the plan year ends

If you leave employment before your FSA plan year ends, you can still submit a claim to be paid out of the FSA. Keep in mind, often the claim must be submitted within 90 days after plan participation ends, but this varies per plan (may vary with the terms of the cafeteria plan document. Some plans have longer periods, others have shorter).

Left employment & using all FSA funds early in the year

    • If you used all of your FSA funds in the beginning of the plan year, and then left your employer, you do not have to pay your employer back for funds not yet taken out of your paycheck.
  • Dependent Care FSAs have a different rule. With a Dependent Care FSA, funds are only available to you after they’re taken out of your paycheck.

Can my spouse and I both have FSAs?

Yes, but you cannot apply the same FSA to the same medical expenses. You also can’t use an FSA to pay for costs that are covered by your insurance plan.

Can my dependents (spouse, children, etc.) have FSAs? And, what if I'm retired?

No, your dependents cannot participate in FSAs (or elect benefits), but you can elect coverage (provide benefits) for them under a Dependent Care FSA.

FSAs can be available for retirees at the employers election.

Self employment & FSAs

    • Self-employed individuals can sponsor a cafeteria plan for their employees.
  • A sole proprietor (the employer-spouse) may sponsor a cafeteria plan under which his or her spouse (the employee-spouse), who is an employee of the sole proprietorship, can participate. The employee-spouse can fill out the election form and elect health insurance coverage for the whole family, including for the employer-spouse. However, two requirements must be met in order for the employee-spouse to participate in the cafeteria plan (and thus in order for the employer-spouse to receive “indirect” coverage). First, the employee-spouse must be a bona fide employee. Second, the employee-spouse must not be deemed to be self-employed (i.e., the employee-spouse must not have invested his or her own assets in the business and must not be an owner under state marital or community property laws). If the IRS determines that the self-employed individual's spouse is self-employed, then the spouse cannot participate in the cafeteria plan and the self-employed individual cannot receive coverage—there would be adverse tax consequences.

Self Employment Examples:

  1. Self-employed individuals include sole proprietors, partners in a partnership, or directors on a corporation's board who are not employees.
  2. Licensed real estate agents are seen as self-employed individuals and cannot participate in an FSA.
  3. Partners in general or limited partnerships cannot have an FSA as they are deemed self-employed. Spouses or other family members who are employees in the partnership can participate in certain instances.
  4. Outside directors from a company who are not employees would be deemed self-employed.
  5. More than 2% shareholders in a S corporation.

More FSA Information:

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