What happens to unused amounts in an employees FSA when employment is terminated?
A. Employers should be aware that COBRA applies to health FSAs. How the remaining balance at termination is treated depends on whether the employee elects or waives COBRA continuation coverage. If the employee elects COBRA, he or she is required to remit the monthly deposit directly, since payroll deductions can no longer occur. This requires depositing after-tax dollars into the FSA. If COBRA is elected, then the period of coverage for that employee continues and the employee can continue to submit claims. If COBRA is waived, then only claims for services incurred before the termination date can be submitted for reimbursement. If COBRA is waived, then the unused portion of the account is forfeited after all claims incurred prior to separation have been submitted.
