Q.- One of our former employees does not think it is fair that he can’t use amounts in his health flexible spending account plan after his termination of employment. Can we just let him use up the rest of what he contributed for expenses he incurs after termination?
A.- The IRS requires that FSA contributions be subject to a “use it or lose it” rule. That means, after an individual is no longer eligible to participate in the FSA (such as after termination of employment), funds remaining in the account must be forfeited if there are no associated eligible reimbursement expenses. If the FSA is subject to COBRA and if the FSA is not "overspent" (more taken out than contributed), the employee may be able to elect to continue the FSA under COBRA. Through COBRA, the former employee will pay premiums on an after-tax basis (plus an administrative fee) but will be able to be reimbursed from the account.