Question of the month: After termination, when do pre-tax programs end?

Dear Gina: An employee enrolled in our company’s Health Flexible Spending Account and Transportation account.  He recently terminated and his last day was 8/4, his last paycheck deduction is on 8/31.  Can he continue to use the funds remaining in these accounts after termination to the end of the month, 8/31? 

Answer: No. Both benefits end at midnight on 8/4 and no new FSA or Transportation expenses can be incurred after that date.  That said, the former employee does have a run-out period (either 60 or 90 days depending on plan provisions) after their last day worked to submit the expenses they incurred while employed to help spend down their balances.  The Health FSA and Transit plans are federally regulated benefits and this rule is put into place by the government to protect the employer.  You don’t want a terminated employee going out after termination and spending a bunch of money thereby putting the employer in the red. 

The Health FSA is also COBRA eligible benefit so the employee can elect COBRA (if the employer is a COBRA-eligible employer), pay an after-tax premium, and access the funds that way as well.  The Transit account is not a COBRA eligible benefit so there is no access to the funds after the last day worked. Luckily, a person enrolled in the Transit account can stop, or reduce, contributions in advance if he knows he’s going to terminate employment. 

It’s a common misunderstanding because medical plan coverage ends on the last day of the month after termination of employment (at least in Washington state. Other states may differ). Therefore, many people assume the ability to be reimbursed for expenses in an FSA, HRA, Parking or Transit account works the same.  Medical plans are often regulated by the state and thus do not function the same as federally-regulated plans.

– Gina



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