Nearly 6.2 million workers were on furlough from their jobs in August 2020, according to the U.S. Bureau of Labor Statistics (BLS). While that number decreased to 1.25 million by August 2021, between 15-22% of all unemployed persons throughout 2021 were on furlough.
A Flexible Spending Account (FSA) is a financial tool that helps workers cover out-of-pocket healthcare expenses. In 2021, there are 31.7 million FSA accounts in force. FSAs are sponsored by employers and typically funded through payroll deductions spread over the plan year. IRS rules dictate that when an employee’s job status changes due to layoff, termination, or retirement, FSA benefits stay behind. Furloughed employees may wonder how their status impacts FSA availability.
How is a furlough different from a layoff?
When an employee is furloughed, they take a forced, unpaid leave of absence. A furlough is a period of temporary unemployment that has a specific end date. (A layoff, on the other hand, completely ends the employment relationship.) The time period away from work for a furlough may be extended or even converted into a permanent separation at some point.
Can I use my FSA while on furlough?
The short answer is, it depends. Your FSA will be subject to the plan document’s provisions on continuation of coverage during a leave of absence or temporary layoff. Some employer FSA plans allow employees to stay enrolled during a furlough period. However, during a non-pay status, the ability to receive claims reimbursement may not be allowed.
Since FSA payroll deductions cease during a furlough (there is no paycheck to deduct from), the employer may offer other funding options, which should be spelled out in the plan document. If contributions are made during a furlough, claims reimbursement is usually allowed.
What happens when I’m reinstated?
Once an employee returns to paid status, payroll deductions usually resume. Missed deductions while on furlough may be made up by taking a lump sum out of a single payroll. Another way to make up the difference is to recalculate per-paycheck deductions to spread the total missed contribution amount over remaining pay periods in the plan year.
Can I change my FSA election because of a furlough?
FSA elections are generally locked-in once the plan year starts. Normally, you may only update your election in response to a qualified event, such as a change in marital status, birth/adoption of a child, or a change in employment status.
Furloughed employees may be allowed to revoke their FSA coverage. Alternatively, your employer may require that an existing FSA election continue during the furlough, but allow you to stop making contributions while on leave.
FSA elections during COVID-19
Due to the pandemic, the IRS made an exception to normal FSA rules for the 2020 plan year. Workers whose employers amend their plans for 2020 can be allowed to make new FSA elections, change elections, or revoke elections. Elections cannot be changed to less than the amount already reimbursed or less than the contributions already made. For example, if you had already contributed $1,000 before the furlough started, you cannot change your election to less than $1,000. Similarly, if you had already been paid $1,200 for claims, you cannot change your election to less than $1,200.
NOTE: As of this writing, the IRS exception for 2020 has not been repeated for 2021 or later plan years.
For further questions about funding and using an FSA during furlough, contact your HR department or benefits administrator.
DataPath, Inc. creates cloud-based solutions for health and dependent care FSA administration.