Leaving a job—whether it's on good or bad terms—can be overwhelming. There are projects to finish, a final paycheck to collect, and health insurance coverage to change. That's why it's important to remember that your flexible spending account (FSA) can help you through the transition. But the chief question on most FSA users' minds when this occurs is: What happens to your FSA when you switch jobs?
FSAs are employer-sponsored spending accounts that allow employees to contribute tax-free money toward a wide variety of health-related expenses. But the "employer-sponsored" part is key, since your FSA requires you to have a job to maintain the account. If you have an FSA when changing jobs, the following checklist can help you navigate the transition like a pro.
Your FSA job change checklist
There's a lot to remember when it comes to your FSA during a job change. Here's what an easy to remember everything you'll want to keep in mind:
- Check your FSA balance.
- Spend any remaining money prior to your last day at the company.
- Submit all reimbursement claims to Human Resources prior to your last day at the company.
Now, the fine print
It's rarely fun to read the details, but when it comes to your FSA, you might be in for a pleasant surprise. Here's how it works—during open enrollment (or when you get hired) you can choose to contribute money to your FSA. This is completely optional, but there are a couple unique rules to note:
- The maximum you can contribute is $2,750 for 2020. Remember that an equal amount will be taken out every paycheck depending on your contribution!
- Even though you contribute to the account throughout the year, the full amount is available to use at the beginning of the year!
A reminder about "use it or lose it"
If you've visited our Learning Center, you know your FSA money is "use it or lose it." In other words, if you don't spend the money in the account by the end of your deadline, you forfeit the cash (though some account holders have deadline extensions, and the possible $500 rollover -- more on that later.). This is crucial to remember if you're switching jobs, because unlike retirement accounts, you cannot roll the money into a new account.
However, you can elect to start a new account with your new employer, even if it's within the same year. Note that your maximum contribution resets when you start a new job.
There are a few exceptions to the "use it or lose it" rule, but for job changes, the rule applies. If you do not use the money in your FSA, you'll lose it. Because of this, it's important to spend the money and file reimbursement claims prior to changing jobs.
(In other words, it's time to shop for FSA-eligible items!)
Uniform coverage rule
It might seem like the "use it or lose it" rule benefits employers, and in a sense it does. If the money in your FSA isn't spent by the end of the year, employers get to keep it (although it can only be used in specified ways, such as towards the cost of administering the FSA program). But there's a lesser known rule that benefits employees: the uniform coverage rule.
The uniform coverage rule does not allow employers to charge employees reimbursement if they spend more money from the FSA than they contributed.
For example, if an employee chooses to contribute a total of $1,000 to his or her FSA, the full amount ($1,000) will be available for the employee to spend at the beginning of the year. However, the employee will only have $83.33 deducted from his or her monthly paycheck.
So, if an employee leaves a job in February, when she or he contributed $83.33 to the account, the employee can technically still spend the full $1,000 without penalty or being forced to provide reimbursement to the employer. Having said that, the employee would still need to file claims for the purchases before leaving the job.
Now, we're certainly not recommending employees take advantage of their employers' contributions to a company FSA program through the uniform coverage rule. However, this rule stands as a potential benefit for those who are forced to change jobs due to an unexpected life change, or layoffs.
This can offer relief for pressing health concerns—new glasses, appointments, prescriptions—that don't go away because of employment changes.
Enjoy your final day at your job (be sure to submit reimbursement claims before you leave the office though!) and feel good knowing that you didn't leave any of your hard-earned money behind.
New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram and Twitter.
Every year, as we approach open enrollment (and it's we receive a lot of the same questions. And discussing the letter of medical necessity (LMN) is always at the top of the list. So, since this a column about the basics of flexible spending account use, we're happy to cover it again. Because it's important, and can impact how you shop for FSA-eligible products and services.
If you've spent some time looking through our Eligibility List, you probably noticed a classification of qualifying medical products and services as "requiring a letter of medical necessity."
In short, an LMN is like a doctor's note. Having an LMN can help any product or service that falls outside the IRS's definition of "medical care" (but can assist the treatment of a condition) get approved for FSA reimbursement.
Defining "medical care"
For a product or service to be FSA-eligible, it must treat, cure, diagnose or prevent a disease or illness. Or it has to affect a function of the body. So a product like a first-aid kit is a no-brainer, as it can be used in a huge variety of medical situations.
However, there are many treatment methods and products available that fall outside IRS guidelines that could be made eligible with some additional documentation from your doctor.
Here's an example: If your doctor suggests massage therapy to treat an injury, it's not FSA-eligible on its own. However, if you get an LMN from your doctor that outlines how the treatment method is essential to your recovery, your benefits administrator may accept it as an FSA-eligible expense.
How to submit a letter of medical necessity
If you and your doctor have identified a medical product or service that can aid the treatment of an injury or medical condition and it falls outside FSA eligibility, here's what you need to do:
- Check with your benefits administrator to see if there is an official form to fill out for the expense to be approved.
- If your doctor is writing a letter on his/her own, the letter must outline: what medical condition is being treated, a description of the treatment (frequency, dosage), and how long the expense will be needed to treat the condition.
- A receipt or invoice must be submitted with the LMN for the full price to be reimbursed.
In some cases, benefits administrators may ask for additional information from your doctor, most likely for products/services that also have non-medical uses.
Beyond its direct medical use, most expenses are non-reimbursable if the individual would have purchased it anyway. In other words, this product can't be something you would purchase even if you didn't have the condition. It needs to be directly related to this course of treatment, and the specific use needs to be confirmed by a doctor.
One example is yoga. If you're already paying for yoga classes unrelated to a medical condition, your payments are not FSA-eligible, and these costs won't be covered retroactively. But if a physician recommends yoga to help a specific condition, they might submit an LMN on your behalf, to allow you to use tax-free funds to cover the costs of classes for a set period of time, until the doctor determines your treatment is complete.
With any luck, you shouldn't have any difficulties getting reimbursed for your expense as long as you keep an open line of communication with your benefits administrator and ensure that your physician is as detailed as possible.
New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.
by Donna Crisalli, FSAstore.com Technical Advisor
To be reimbursable from an FSA or HSA, an expense must be for medical care. Some items or services may be for medical care or may be for personal use. To tell the difference, plan administrators often request a “letter of medical necessity," or LMN.
An expense is for medical care if the primary purpose for the expense is to treat, cure, mitigate, diagnose, or prevent a disease or illness, or to affect a structure or function of the body. Items and services that usually are personal, such as air conditioners, may be used for medical purposes, for example to reduce the symptoms of asthma. Other items and services, such as vitamins and exercise equipment, usually are used to maintain general good health, which is not medical care eligible for reimbursement, but may be used to treat or mitigate a disease, such as high blood pressure, osteoporosis, or obesity.
An item or service is reimbursable as medical care only if an individual's primary purpose for the expense fits within the definition of medical care. Because a plan administrator is unable to look into someone's mind, the plan administrator will look at certain objective facts and circumstances to determine an individual's purpose. These include:
(1) Has a doctor or other medical professional determined that the individual (or a qualifying family member) has a disease or illness?
(2) Has a medical professional recommended the item or service to treat, mitigate, etc., the medical condition?
(3) Is the item or service medically effective?
(4) How soon did the individual purchase the item or service after the diagnosis of the medical condition?
(5) Are there less expensive treatments?
These questions don't need to be asked if the item or service has no use other than medical care (for example, x-rays and other diagnostic tests, supplies and equipment such as bandages and wheelchairs). These facts are relevant only when an item has a non-medical use. They are guidelines for a plan administrator to determine if a personal use item is medical care, based on all the facts and circumstances of a particular case.
There is no set requirement that every one of the facts and circumstances is present in every case. However, it always will be necessary to determine that a medical condition is present and that the item or service is for the treatment or improvement of the medical condition. The letter of medical necessity provides the plan administrator with at least this information. (The term “letter of medical necessity" is misleading because there is no requirement that the treatment is necessary if it is for medical care. It is the shorthand plan administrators use for a letter from a health provider providing this basic information.)
However, a letter from a doctor or other health care practitioner stating that there is a medical condition and prescribing the item or service may not provide all the information a plan administrator may need. First, the medical use has to be the primary purpose for the expense. Second, the expense is not reimbursable if the individual would have purchased it anyway (would not have purchased it without the medical condition, a requirement called the “but for" test). The plan administrator may ask for information relating to some or all of the other facts and circumstances to determine if the medical use is the primary purpose for the expense and whether the “but for" test is satisfied.
Let's apply these rules to some concrete examples.
Jack's doctor diagnoses Jack with a heart condition. The doctor recommends light exercise, such as brisk walking, to lessen the symptoms and reduce the risk of a heart attack. The next day Jack buys a $500 pair of athletic shoes and begins walking a mile every day. Jack has never walked for exercise or owned athletic shoes. Jack has a medical condition that the shoes will help, he buys the shoes right away, and he has never owned this type of shoes before. Jack did not buy the cheapest shoes available, but the rest of the facts and circumstances show that his primary purpose in buying the shoes is to help his heart condition and he would not have bought them “but for" the medical condition. Jack may be reimbursed for the athletic shoes from his FSA.
Jill has high blood pressure. Her doctor suggests she buy a blood pressure monitor. Jill buys a smart watch, which has a blood pressure monitoring function. Jill owns a smart watch but was thinking about upgrading it. After buying the new watch, she does not have to buy another blood pressure monitor. Jill has been using a smart watch, planned to buy one before the doctor made the recommendation, and chose an expensive device with many other functions besides monitoring blood pressure. Although Jill may use the watch for a medical purpose, the facts and circumstances show that the medical function is not Jill's primary purpose in buying the watch and she would have bought it or a similar watch even if she did not have the medical condition. The smart watch is not eligible for reimbursement.
James has emphysema. His doctor recommends light exercise, but James also has severe arthritis and is unable to walk for exercise. He builds a simple lap pool in his yard and uses it only to swim laps, which he does most days. His family members also sometimes swim laps in the pool. James works long hours and lives in a remote area, and it is not convenient for him to go to a gym or other facility with a pool on a regular basis. James uses the pool for medical purposes, he built it only after receiving the doctor's advice, and he built the most basic pool for the purpose. There are reasons why he does not engage in another kind of exercise. Although his family members also sometimes use the pool, the facts and circumstances indicate that James's primary purpose in building the pool is to treat his emphysema and he would not have built the pool otherwise. James may use his HSA for the cost of the pool.
Jane has not had a medical condition and has been getting massage therapy once a month to reduce stress and improve her general good health. Jane's chiropractor diagnoses Jane with muscle strain from lifting a heavy object and suggests massage therapy might help the condition. At her next massage therapy appointment, Jane asks the therapist to focus on the strained muscles. Jane may have a medical purpose for this particular massage therapy appointment, but the facts and circumstances indicate that the medical purpose is not her primary purpose and she would have had the massage therapy even without the medical issue. Jane is not entitled to reimbursement for the massage therapy.
In each of these situations, a LMN would tell the plan administrator that there is a medical purpose for the athletic shoes, the smart watch, the swimming pool, and the massage therapy, which usually are personal and not medical expenses. The plan administrator would need to know more of the facts and circumstances, however, to determine whether the medical purpose is the primary purpose and if the “but for" test is satisfied. This additional information may be included in what the plan administrator calls a “letter of medical necessity" or the plan administrator may request it separately.
These rules may seem very complicated, but when the answer to the question “is this an expense for medical care" depends on the facts and circumstances, there is no simple answer that applies in every case.