hands hold money jar If you haveany amount in your FSA at the time you lose your job and yourhealth care coverage, your employer must offer you the ability tocontinue to have access by paying a COBRA premium. (Photo:Shutterstock)

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Millions of people have lost their jobs or been furloughed because ofthe COVID-19 pandemic. Understandably, many people have questionsregarding job loss and how that will impact their tax-free benefitsincluding HSAs and FSAs. To help you navigate and manage yourbenefits during these uncertain times, the following are somefrequently asked questions with some answers.

What happens to my HSA when I lose my job?

You continue to own your HSA after you lose your job. You maytake distributions from your HSA if you want or need to; it's your decision. If you continue to be covered by anHSA-compatible high deductible health plan (HDHP) you can continuemaking contributions to your HSA.

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Related: 5 ways the CARES Act affects HSAs, FSAs andHRAs

What are the tax consequences of an HSA distribution after youlose your job?

Distributions from your HSA are tax free if those distributionsare used to pay or reimburse you for qualified medical expenses.Distributions from your HSA used to pay health insurance premiumsare tax free for (i) HSA owners age 65 and over, (ii) COBRAbeneficiaries, and (iii) individuals receiving unemploymentcompensation. If the distribution is not used for qualified medicalexpenses or for health insurance premiums for the individualsdescribed above, then the distribution will be taxed as income. A20 percent additional tax is also imposed if you are not disabledor are not eligible for Medicare (currently age 65).

Can I use my HSA to pay premiums for my employer-providedHSA-compatible HDHP after losing my job?

If you lose your job and as a result you lose employer-providedhealth insurance coverage, you are then eligible under COBRA tocontinue that coverage by paying the full premium for thatcoverage. Since you are a COBRA beneficiary, the distribution fromthe HSA to pay for the COBRA premiums is tax free. If the HDHP wasnot employer-provided coverage, you are not eligible for COBRA forthat coverage. Consequently, you may only take a tax-freedistribution from your HSA to pay for the HDHP premiums if you arereceiving unemployment compensation

What happens to my FSA when I lose my job?

The rules are different for FSAs than for HSAs. Generally, anFSA is a group health plan and, in most cases, if you have anyamounts in your FSA at the time you lose your job and your healthcare coverage, your employer must offer you the ability to continueto have access by paying a COBRA premium.

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This COBRA option, however, is generally limited, as long as theFSA is considered an "excepted benefit" as most are. If your FSA isan excepted benefit, then your FSA can be continued under COBRA forthe remainder of the plan year (not for the full 18 months as withother employer-provided health plan coverage). Also, in this case,the employer does not have to offer COBRA continuation of FSA atall if the cost to continue the FSA for the rest of the year ismore than or equal to the unspent balance in your FSA (i.e., it is"overspent"). If the FSA is not an excepted benefit, the employerwill need to offer COBRA continuation of FSA–irrespective ofwhether it is over- or underspent-–for the full 18-month maximumCOBRA period.

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The COBRA premium is calculated as the amount of thecontributions you were to make to the FSA for the rest of the yearand any employer contributions to the FSA. As a result, manyindividuals decide not to pay the COBRA premium for continuing tohave coverage under the FSA for the rest of the year, unless theyhave a large unspent balance in their FSA when they losecoverage.

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Let's say that you had elected to have $100 a month taken out ofyour salary on a pre-tax basis and put in an FSA ($1200 for theyear). At the time that you lost coverage, you had not used any ofthe amounts in your FSA. If you lost your job and coverage inMarch, after having contributed $300 to the FSA in the first threemonths of the year, your COBRA premium for the FSA would be $100per month–plus a 2-percent administrative fee–for the remainder ofthe year. If you lost your job and coverage in November, your FSAbalance would be $1,100 and you would have to pay an additional$102 to continue to use the FSA in December. If the FSA allowed fora $500 carryover of unused FSA amounts into the following year, youwould be able to use up that $500 in the following year withoutpaying any more COBRA premiums.

If I elect COBRA to continue using my FSA, what expenses can bepaid for?

The FSA may only be used to pay or reimburse you for qualifiedmedical expenses.

If I elect COBRA to continue using my FSA, can I use my FSA topay for COBRA premiums for the health insurance coverage Ilost?

No, unlike HSAs, FSAs cannot be used to pay for health insurancepremiums.

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William Sweetnam is the legislative andtechnical director for ECFC, a non-profit organization dedicated tomaintaining and expanding employee benefit programs on atax-advantaged basis.

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