Flexible Spending Account Strategies for Tough Economic Times

If you lose your job, you could actually come out ahead financially with the "flexible" health account.


If you're worried about losing your job, deciding what to do about your health insurance coverage may be your most pressing benefits concern. But there's another health-related benefit that bears considering: your flexible spending account.

FSAs allow employees to contribute money to an account on a pretax basis to pay for healthcare expenses. These payroll deductions, which typically amount to a couple thousand dollars a year, cover out-of-pocket healthcare expenses like dental work, eyeglasses, insurance deductibles, and over-the-counter drugs.

FSAs don't generally attract much attention, except at year-end when employees have to spend down their balances or risk losing whatever funds they have left in their accounts. But if you leave your job during the year, instead of forfeiting the money in your FSA, you could actually come out ahead financially. Even if you've paid in only a portion of the amount you elected for the year, you can submit claims that cover the entire amount, as long as you do so before your employment termination date.

So, for example, say you've elected to have $200 withheld from your paycheck every month and deposited in your FSA. If you get laid off in April, your FSA account will have only $800 in it. But you can submit claims for the entire $2,400 you would have deposited had you funded the account for the whole year. The key is to act promptly, before your job ends. "If [employees] have paid in and have some medical bills they could incur sooner rather than later, they probably should do that," says Stephen Huth, a senior writer and analyst with Wolters Kluwer Law and Business, an international publisher. No kidding.

But what happens if you don't get much notice before your job ends, and you don't have $2,400 worth of medical expenses to claim right away? You may not want a half-dozen pairs of eyeglasses, or you may have planned to tap that money over a period of months for ongoing physical therapy, for example, or dental work. If that's the case, there's no need to cram all that work into two weeks before you leave your job.

Many people don't realize it, but you can elect COBRA continuation coverage for your FSA, just as you can for your health insurance. In that case, you'd be responsible for continuing to make the $200 monthly payment, and your employer could charge an additional 2 percent administrative fee. But it's a realistic option if you need more time to spend down the total. (COBRA coverage for FSAs is not eligible for the 65 percent subsidy available under the economic stimulus package to workers who want to extend their health insurance under their former employer's plan, however.)

Unfortunately, if your employer goes out of business, you may have few if any options for recovering any FSA deposits. "If you hadn't submitted any claims, you're out of luck," says Huth. "The money belongs to the company."

In this economy, nothing is certain. If you have any inkling that you may be out of a job, move with all deliberate haste to spend the funds in your FSA. This is one time when spending money may make more sense than saving it.

Check out these recent stories about managing your health benefits in uncertain times and the new COBRA subsidy and how to apply for it.