Is a terminated employee entitled to reimbursement from a health FSA?

[Guest GARNETT]

Consider the following:

An employee elects, prior to the beginning of the plan year, to contribute one thousand two hundred dollars ($1,200) to a Health FSA at the rate of one hundred dollars ($100) per month. The employee incurs reimbursable expenses of two hundred dollars ($200) in February which are reimbursed to the employee in March.

Additionally, the employee incurs reimbursable expenses of seven hundred dollars on June 2. However, the employee's employment is terminated on June 30, at which time the employee has only contributed six hundred dollars ($600) to the Health FSA. Further, the employee's June 2 expenses have not been reimbursed as of the date of the employee's termination of employment.

Is the employee entitled to be reimbursed for the entire amount of his June 2 expenses ($700), even though he only contributed six hundred dollars ($600) to the Health FSA prior to his date of termination, and he was already reimbursed two hundred dollars ($200)?

[Guest Phil Larson]

I believe the short answer is yes. Most health FSAs provide a period of time after the end of the plan year during which claims incurred prior to termination can be submitted. This is distinguished from claims incurred after termination. Post employment incurred claims can only be reimbursed if a COBRA elections is made.

Sounds unfair but plans can use the use it or lose it money left in the plan to offset these claims.

[Guest Tamre]

It really depends on how your plan document reads. In our plan we stipulate that an employee has 90 days after his or her termination to submit claims incurred prior to the termination date. As far as the issue of whether or not the employee is entitled to the 700.00 the answer is yes. The IRC is very clear on the fact that the medical FSA is considered insurance and therefor risk is implied on the part of the employer. Any claims submitted for serives incurred after the termination date would not be paid unless the ex-employee elected COBRA coverage for their FSA. Problem is that sometimes the ex-employee will elect COBRA just to recoup FSA money and terminate paying premiums as soon as they have depleted their account. It is another risk incurred by the employer.