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Steps to Take When Healthcare FSA Participants Terminate Employment

January 15, 2018

3 minute read

Category: Reimbursement Accounts

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When Healthcare Flexible Spending Account (HCFSA) participants leave employment mid-plan year, certain actions need to be taken. These actions are often overlooked, but are extremely important in order for your Section 125 Plan to remain compliant. 

First, employers should notify the FSA recordkeeper as soon as possible to ensure the account and card (when applicable) is inactivated to avoid overspending after termination. Then, employer should also evaluate the former employee's account to determine if the employee overspent or underspent his or her account while participating.

Healthcare FSAs and COBRA

If an employer is subject to COBRA, when an employee terminates mid-plan year, and has a positive balance in their Healthcare FSA, COBRA continuation coverage must be offered. COBRA continuation coverage generally must be offered on group health plans and Healthcare FSAs are categorized as a type of group health plan. Offering COBRA continuation coverage allows participants to continue using their funds through the end of the plan year as long as contributions continue.

Let’s look at a hypothetical example. Employee A terminates employment and has a $1,000 balance in his Healthcare FSA at the time of termination. He is scheduled to get LASIK eye surgery, but the surgery is scheduled outside of his employment dates. If Employee A’s Healthcare FSA is covered under COBRA, he can elect COBRA and still make contributions to his account. By electing COBRA and continuing to make contributions through the end of the plan year, Employee A can use his Healthcare FSA for reimbursement if he has LASIK eye surgery during the current plan year.

Claimed More Than Contributed

In some instances, participants leave mid-plan year, but have claimed more than contributed. Claimed more than contributed means that the participant has used more than the amount contributed in to his or her account. For most Healthcare FSAs, the plan sponsor need not offer COBRA continuation coverage. In this case, however, the employee is still eligible to use their full election amount for eligible claims incurred while still employed. Employers may not limit participants from submitting claims and getting reimbursed for eligible claims, even for amounts greater than their contribution when they were employed.

Let’s look at a hypothetical example. Employee B’s annual election is $1000, which she receives at the beginning of her plan year beginning January 1. She files eligible claims in January and February totaling $500. If the employee's employment ends on March 1, she will have only contributed a total of $166.66 to her Healthcare FSA. This employee has overspent her account because claims reimbursed exceed the contributions. Employee B generally is not eligible to elect COBRA continuation coverage for the Healthcare FSA. However, if the employee has any additional eligible claims incurred prior to her date of termination, those claims may still be submitted for reimbursement up to the full elected amount of $1000.

To learn more about offering COBRA continuation coverage for Healthcare FSAs, contact your Section 125/FSA Provider.

 

This blog is up to date as of February 2020 and has not been updated for changes in the law, administration or current event.

  • Tags:
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  • HCFSA

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