FSA Termination Rules: What Happens to Your Funds After Leaving?

Flexible Spending Accounts (FSAs) offer tax advantages for medical expenses but come with strict rules, especially when employment ends. Many are caught off guard by how quickly access to funds is cut off and what happens to any remaining balance. Understanding deadlines, continuation options, and potential forfeiture is key to maximizing an FSA before it’s too late.

When FSA Coverage Ends

Employer-sponsored FSAs end when employment does. Unlike Health Savings Accounts (HSAs), which stay with individuals, FSAs are tied to employers. Once employment ends—voluntarily or otherwise—contributions stop, and remaining funds may no longer be accessible.

Most employers require expenses to be incurred before the final day of employment to qualify for reimbursement. Some plans allow a short grace period for claim submissions, but this does not extend the timeframe for incurring new expenses. Any remaining balance is typically forfeited unless specific provisions apply.

Under the “uniform coverage rule,” employees can access their full annual election amount anytime during the plan year, even if they haven’t contributed the full amount. If an employee leaves after using more than they contributed, they do not have to repay the difference. However, if they contributed more than they spent, the unused balance is usually lost unless alternative options exist.

Claim Submission Deadlines

Former employees have a limited window, known as the “run-out period,” to submit claims for expenses incurred while still covered. This period typically ranges from 30 to 90 days after termination, depending on the employer’s plan. The exact deadline is outlined in the Summary Plan Description (SPD), making it essential to review this document when leaving a job.

The run-out period only applies to expenses incurred before coverage ended. Any new expenses after termination are ineligible for reimbursement. Prompt submission is advisable to avoid processing issues or missing paperwork that could lead to claim denials. Required documentation includes itemized receipts and explanation of benefits (EOB) statements from insurers. Incomplete submissions may result in rejection.

Continuation Coverage

Some employees may continue FSA coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act), but only until the end of the plan year. This option is available only if the account was underspent at termination. Employees who have already been reimbursed for more than they contributed are ineligible.

Electing COBRA requires paying remaining contributions out of pocket, plus a 2% administrative fee. For example, if an individual elected to contribute $2,400 annually and had contributed $1,200 before leaving, they would need to pay the remaining $1,200 plus a $24 fee. This allows use of the remaining balance for eligible expenses through the plan year’s end but does not extend coverage beyond that period. Since FSAs are funded with pre-tax payroll deductions, COBRA payments must be made with post-tax dollars, reducing the overall tax benefit.

Unused Funds and Plan Forfeiture

Any remaining FSA balance is generally forfeited unless specific plan provisions allow otherwise. The “use-it-or-lose-it” rule, based on IRS regulations, prevents employers from refunding unused balances to departing employees. Employers may use forfeited funds to offset administrative costs, reduce employee contributions for the next plan year, or redistribute them among participants if permitted by the plan.

Some FSAs allow a carryover of up to $640 for 2024, but this is typically restricted to active employees. If a plan offers a grace period, former employees generally cannot use it unless they elect COBRA, which is rarely cost-effective for FSAs.

Documentation Requirements

Proper documentation is essential to ensure FSA claims are approved, especially after employment ends. Employers and third-party administrators (TPAs) require detailed records verifying expenses meet IRS guidelines. Receipts, invoices, and explanation of benefits (EOB) statements must be retained and submitted correctly.

Receipts should include the provider’s name, date of service, description of the expense, and the amount paid. Credit card statements alone are insufficient, as they do not specify the nature of the service or product. If an expense was partially covered by insurance, an EOB from the insurer is often needed to confirm the out-of-pocket portion. Submitting claims electronically through employer portals or TPA websites can speed up processing, but tracking confirmation emails ensures submissions are received before the deadline.