Terminated Employees

A terminated employee's pre-tax contributions cease upon termination.  However, the employee may continue health policies and a Health FSA under COBRA or a pre-payment option.  The continuation for the FSA has to meet certain criteria as listed below under COBRA Coverage.  The reimbursement for expenses differ for Medical Reimbursement and Dependent Care FSAs.

Medica Reimbursement FSAs
A terminated employee cannot submit claims for services occuring after the employee's termination date.  however, the employee can be paid for expenses incurred before the termination date up to the current annual election minus any previous claims paid as long as they are submitted before the end of the Run-Out Period.

Dependent Care FSAs
If so stated in your Plan Document, a terminated Participant is entitled to be reimbursed for Dependent Care claims incurred at any time during the employee's final Plan Year up to the amounts credited to the Dependent Care Account.  In other words, the employee can submit and be paid for claims for qualified dependent care expenses incurred after termination, but before the end of the Plan Year not to exceed actual deductions minus any previous claims paid.

COBRA Coverage
An employee can elect to continue a Health FSA under COBRA unless one of the following exceptions occur:

1. The employer falls under the small employer exception for COBRA.
2. Upon date of termination, the employee has received reimbursements from the Health FSA that exceed the total amount the employee has paid into it.
3. The Plan Year in effect on the participant's date of termination ends.

Assuming none of the above exceptions applies, a terminated employee must be offered COBRA coverage in a manner similar to that of Group Health Insurance Benefits.  The same notifications, deadlines and premium payment requirements apply.  If the employer has hired a third-party COBRA Administration Firm to handle this function, make sure it is aware of the Health FSA and include it in their notification package to terminated employees.

Pre-payment Option
As an alternative to COBRA, employer may give terminating employees the option to pre-pay the balance of their annual election from their final paycheck on a pre-tax basis.  This accomplishes two things: 1) The terminating employee who still may need time to incur expenses in order to avoid forfeiting contributions already paid into the plan, can still realize the tax savings on the remaining contributions paid after termination of employment; and 2) the employer is protected from COBRA enrollees who create a situation in which they are pre-funded (reimbursed for more than they've paid into the plan) and subsequently terminate their COBRA coverage prior to the end of the plan year.

If a terminating employee wishes to pre-pay the balance of their annual election from their final paycheck, the employer should obtain a written instructions from the employee prior to deducting the excess contribution amount.  If you present this option to a terminating employee and they decline it, COBRA coverage must be offered.