A Flexible Spending Account (FSA) is an excellent financial tool that helps millions of workers cover out-of-pocket healthcare expenses. Sponsored through an employer, an FSA is usually funded through a payroll deduction each pay period over the course of the plan year. When an employee’s job status changes due to a layoff, change in employer, or retirement, the FSA benefits stay behind. However, employees who have been furloughed may be wondering how their job status impacts their ability to use this benefit. Learn more below about what happens with an FSA during a furlough period.
What is a furlough?
When an employee is furloughed, they are taking a forced, unpaid leave of absence from their job. Furloughs are temporary and have a specific end date; whereas a layoff means the employment relationship with the company is over. However, the time period away from work may be extended or even later converted into a permanent separation.
What happens to your FSA during a furlough?
Since a furlough is unpaid, people wonder how it will affect their ability to use their FSA. FSAs during a furlough are subject to the plan document’s provisions governing continuation of coverage during a leave of absence and/or temporary layoff.
Payroll deductions for the FSA will likely cease during the furlough period. Depending on plan setup, the employer may offer other options to fund your account. If allowed, the docs should also specify how employees will keep paying monthly contributions to maintain coverage during any leave period.
Some employer plans may allow employees to stay enrolled in their healthcare FSA during the furlough period. The employer may need to amend its plan to allow the continued FSA coverage. However, during a non-pay status, the ability to receive claims reimbursement may not be allowed.
What happens when I’m reinstated?
Once an employee returns to paid status, payroll deductions may resume. Missed deductions from paychecks could be made-up by deducting a lump sum or recalculated and spread out over remaining pay periods to match the annual FSA election.
Can I change my FSA election during a furlough?
Generally, FSA elections are locked in once the plan year starts. Normally, you may update your election due to a qualified event; a qualified event includes a change in marital status, birth/adoption of a child, or a change in employment status.
If you are furloughed, you may be allowed to revoke your FSA coverage. Alternatively, the employer may require that coverage continue during the leave under an existing FSA election, but allow the employee to discontinue contributions during the leave period.
FSA elections during COVID-19
Due to COVID-19, the IRS has made an exception to the normal rules. If your employer amends its plan for 2020, you may be able to make a new FSA election, change the election, or revoke an election. One thing to keep in mind is that in such a case, elections may not be changed to be less than the amount that has been paid out for reimbursement or for contributions already made. For example, if you have already contributed $1,000 before the furlough started, you could not change your election to less than $1,000. Similarly, if you have already been paid $1,200 for claims, you could not change your election to less than $1,200.
For further questions regarding an FSA during a furlough, contact your HR department, benefits administrator or qualified legal counsel.
DataPath, Inc. creates cloud-based solutions for health and dependent care FSA administration.