What Happens to Your FSA If You're Laid Off

I've been contributing $200 per month to my health-care flexible spending account, but it looks as though I might get laid off soon. Could I spend the full $2,400 that I had planned to contribute for the year, or just the $600 that I've contributed so far?

There's good news and bad news about FSA contributions. On the bright side, you can use the full $2,400 for eligible medical expenses at any time -- even if you lose your job before the year is over. "An employer cannot ask for the money back in most cases, unless the plan is written in a certain way, which is highly unusual," says Jody Dietel, chief compliance officer for WageWorks, which administers FSAs for many large employers. Ask your employer about the rules before you spend the extra money.

But you usually have to spend the money before you lose your job, or else you lose the remaining cash in the account. If you think that your job may be in jeopardy, this could be a good time to visit the dentist, eye doctor and pharmacist and to buy an extra pair of eyeglasses. You can submit the paperwork even after you lose your job, as long as you incurred the expenses before your termination. "There's typically a claims run-out period that gives you some extra time to submit eligible claims for reimbursement," says Kelly Traw, of Mercer, a health-benefits consulting firm.

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There may be a way, however, to buy yourself some extra time to use the cash in the account. Some employers give you until the end of the month to use the money, or you might be able to sign up to extend your FSA benefits under COBRA - the same federal law that lets employees keep group health insurance for up to 18 months after they leave their jobs. Most companies with 20 or more employees are required to offer COBRA coverage, which also applies to money in flexible spending accounts. You don't have to use COBRA for health insurance to have COBRA coverage for your flex plan; they're separate from one another.

To keep your FSA open, you would continue making the same monthly contribution plus a 2% charge. So if you signed up to contribute $200 every month while working, you'll contribute $204 per month to keep COBRA coverage for your flexible spending account. For most health-care FSAs, COBRA is offered only if your year-to-date contributions exceed your year-to-date claims when you leave your job, says Dietel. Then you can pay for COBRA for just a month or two while you use the FSA money for health-care costs (the contributions are after-tax when you're no longer an employee; they were made pretax while you were still employed).

You can use the FSA money for eyeglasses, contact lenses, prescription drugs and many nonprescription medications, dental care, and a lot of other medical expenses that insurance doesn't cover. For more information about uses for the money in your flex account, see 25 Ways to Spend Your Flex Account.