What Happens to FSA When You Change Jobs?

Flexible Spending Accounts (FSAs) serve as a valuable employee benefit, allowing individuals to set aside pre-tax money for eligible healthcare or dependent care expenses. These accounts operate under a “use-it-or-lose-it” rule, meaning funds typically must be spent within the plan year or they are forfeited. When individuals transition between jobs, questions often arise about the fate of their accumulated FSA balance. Understanding the rules governing these accounts during a job change is important for maximizing their benefit and avoiding the loss of funds.

Options for Your Existing FSA Balance

When leaving an employer, your existing Flexible Spending Account balance can be managed in several ways, depending on your former employer’s specific plan design. A “spend-down” period allows you to use remaining funds for eligible expenses incurred before your last day of employment. Some plans permit claims for expenses incurred up to the end of the month in which your employment terminates.

Beyond the termination date, some FSA plans offer a “grace period,” which provides a limited extension to incur new eligible expenses. This period can last up to two and a half months after the plan year ends. For instance, if your plan year concludes on December 31, a grace period might extend your ability to incur expenses until March 15 of the following year.

Another provision often found in FSA plans is a “run-out period.” This timeframe, typically up to 90 days, allows you to submit claims for expenses that were incurred before your employment ended or the plan year concluded. Unlike a grace period, the run-out period does not allow for new expenses to be incurred; it is solely for processing outstanding claims.

Funds not spent or claimed by the end of any applicable grace or run-out period are generally forfeited back to the employer. Some plans also offer a “carryover” feature, allowing a limited amount of unused funds to roll over into the next plan year. However, an employer’s plan typically offers either a grace period or a carryover, but not both. If you leave your employer, any carryover benefit is generally lost unless you elect COBRA continuation for your FSA.

Continuing FSA Coverage Through COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) offers a pathway to continue health-related benefits, including Flexible Spending Accounts, after employment ends. COBRA allows access to your FSA funds, but eligibility requires your account to be “underspent” at job termination. This means your total FSA contributions must exceed your reimbursed amount as of your termination date.

If eligible, electing COBRA for your FSA means paying the full cost of coverage. This includes both employee and employer contributions, often with an additional 2% administrative fee. Payments are typically made with after-tax dollars. The high cost of COBRA FSA can be a significant disadvantage, making it less attractive unless a substantial balance remains.

COBRA coverage for an FSA is generally limited. In most cases, it extends only until the end of the plan year in which the qualifying event occurred. However, if your former employer’s FSA plan includes a carryover provision, COBRA coverage may extend for a longer period, typically up to 18 months, to allow access to those carried-over funds.

Enrolling in an FSA at Your New Employer

A change in employment status is recognized as a “qualifying life event” (QLE) by the Internal Revenue Service (IRS). This allows you to enroll in a new Flexible Spending Account with your new employer, even outside of typical annual open enrollment periods. You do not have to wait for a specific enrollment window to begin participating in your new company’s benefits.

Enrolling in an FSA at your new employer generally involves reviewing their benefit offerings and making an election for your desired contribution amount. The FSA from your previous employer is entirely separate from any new FSA you enroll in. Funds from your old FSA do not transfer to your new FSA. Each FSA is tied to the specific employer that sponsors it.

When deciding on your new FSA election, considering the timing of your old FSA’s end is beneficial. If you have a grace period or run-out period with your former employer, you might plan your new FSA’s start date and election amount to avoid gaps or overlaps in your ability to cover eligible expenses. This strategic planning helps ensure continuous access to pre-tax funds for healthcare or dependent care needs.

Key Actions and Information for Managing Your FSA Transition

Managing your Flexible Spending Account during a job change requires proactive engagement and information gathering. Upon notice of a job change, contact your former employer’s Human Resources or benefits administrator. Inquire about their FSA plan’s specific rules, including any grace periods, run-out periods, or COBRA eligibility. Understanding these details is essential, as provisions can vary significantly between employers.

Review your former employer’s Summary Plan Description (SPD) for comprehensive details about the FSA plan’s rules and your rights. This document outlines claim submission deadlines, forfeiture policies, and continuation options. Keep meticulous records of all eligible expenses and receipts, especially during the transition period. This documentation supports any claims you need to submit and provides a clear audit trail for your expenditures.

Submit all claims promptly within the specified run-out period to avoid forfeiture of funds. Even if you elected COBRA, timely claim submission for expenses incurred during the coverage period is necessary. Before electing an FSA with your new employer, review their plan details to ensure it aligns with your anticipated healthcare or dependent care needs.