FSA and Termination

[Treefarn]

What is the name of your state (only U.S. law)? NJ, employer in PA

For the year 2008, I had a healthcare FSA which I was donating $1500 into. On July 1, I was laid off from my job, and there was $750 in the account at the time, but I only had $500 in medical expenses (most of my family's expenses always occur in the 2nd half of the year.)

According to the company that runs the FSA, that money is forfeit. As per a photocopy of a page entitled 'Cafeteria Plans' (I will be getting more information about what this actually is, but I assume it is a page from the actual contract between my employer and the FSA) 'Health FSA coverage is like insurance. If the employee stop making contributions (that is, paying the premium) then coverage stops. Cobra rights may apply.. [I didn't purchase COBRA benefits]. The administrator should only reimburse claims incurred while the health FSA coverage is actively in force.' After that quote it is noted that this is based on 'IRS Information Letter dated July 8, 1998', a copy of which was not provided and I have been unable to locate (which I have since requested).

So my question is, does this seem right? This FSAs contained MY money, my salary, and now I am unable to get this money back due to circumstances beyond my control. So it has now turned into a risk, a gamble. Do I donate money next year, knowing I could get laid off from another job? I don't think these programs were intended to be risky in the least.

Consider this scenario. I sign up to donate $5000 per year. I get paid on the 1st and 15th of the month. So on January 1 I get paid and $208.33 gets put into the account. On January 2 I get laid off. Does this seem right?

 

[ecmst12]

If you are terminated and there is money that you have contributed still in the account (not just scheduled contributions but ACTUAL contributions) you usually have 30 days to submit claims for that money and then it is gone. An FSA is a 'use it or lose it' benefit.

On the other hand, if you had used all $1500 before you got laid off, which you are allowed to do based on scheduled contributions), your employer would not have been able to recover that money from you. So it does work both ways.

 

[Treefarn]

I think you missed my point.

The issue is that I was laid off 7/1. THere was $750 in the account at that time, but I had only incurred expenses of $500. The plan has paid off the $500 and the $250 is apparently forfeit.

 

[pattytx]

I think YOU miss the point. If you did not use the remaining amount that you had actually contributed within 30 days of your termination, the remaining funds are forfeited. That is an IRS regulation and it's why FSAs receive the preferential tax treatment they do; both the employer and the employee have a risk.

 

[ecmst12]

That IS the point - it is Use It Or Lose It. You didn't use it, so it is gone.