FSA Reimbursements After Termination

Posted by BAS - 02 September, 2021

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A recent IRS information letter confirms that a participant should elect COBRA continuation coverage, if offered, to get reimbursed from a health FSA for expenses incurred after termination of employment.

The letter, which is not formal guidance, addresses an inquiry from an employee who was terminated from employment with funds remaining in his health FSA. The participant wanted his FSA account restored with additional time to incur reimbursable expenses.

The U.S. Department of Treasury advised that generally, when an individual terminates employment, the individual may continue participating in a health FSA by electing to continue coverage under COBRA. Unless coverage is continued under COBRA, the FSA is subject to the “use-it-or-lose-it” rule under which unused amounts in an FSA are forfeited at the end of the plan year and upon termination of participation (after the claims submission period expires). The letter did recognize IRS Notice 2021-15 which gives employers the right (but not the obligation) to amend their plans to offer the ability for participants to carryover unused FSA amounts from the 2020 plan year to the 2021 plan year and/or adopt a special limited rule for post-termination reimbursements.

A copy of the Treasury Letter may be accessed by clicking here.

Topics: HR & Benefits Compliance, Flexible Spending Accounts, HR & Benefit Plans, HR & Benefits News


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