Wednesday, February 8, 2017

Don't Leave Money On The Table: Changing Jobs With A Medical FSA = Free Money

Medical flexible spending accounts (FSAs) offer you a way to pay for certain medical expenses using pre-tax dollars. At the beginning of the year, you tell your employer how much money to put into this account for the year and, each paycheck, a portion of your pay is diverted into the account. The amount is divided equally over the course of the year. You get that money back by submitting receipts for covered medical expenses to the plan administrator, who then disburses the money from the account to you.

These accounts are use-it-or-lose-it accounts, meaning if you don't submit enough qualifying expenses during the year to use all your money, you lose whatever is left. (Recent changes allow your employer to offer you the opportunity to roll some funds over into the following year, but this is something your employer has to opt-in to, so check your plan details to see if this option is available to you.)

The IRS states these plans have to operate under Uniform Coverage Rules (PDF) for cafeteria plans. This means the entire amount of your yearly contribution must be made available immediately at the start of the year.

So if you elect to contribute $2,500 for the year, you can submit a qualifying medical claim for $2,500 in January and get the entire amount paid to you, even though you have not yet contributed that amount to the plan. (Remember, your contribution is spread out over all your paychecks for the year. So if you get paid twice a month, or 24 times a year, each paycheck you deposit $104.17 to the account.)

As I mentioned before, this is a use-it-or-lose-it account. If it gets to be December 31 and you have not spent $2,500 in qualifying medical claims throughout the year, you lose whatever excess funds are in the account. But...

What happens if you change jobs during the year?

Free Money Happens!

Because the plan must operate under Uniform Coverage Rules, employees have a way to get some free money though a loophole.

Suppose you elect to contribute $2,500 to your FSA account. In January, you go crazy and go to a bunch of doctors and buy all kinds of covered items. You manage to incur $2,500 in medical costs during the month. You submit the receipts and the plan pays you $2,500. On February 1, you change jobs.

Because you were only at your old job for one month, you only contributed 1/12 of $2,500 to the account. But they already paid you the full $2,500. Here's the loophole:

Your employer cannot recoup that money from you.

You just got $2,292 in free medical care! (That's $2,500 minus the 1/12 of $2,500 you paid in January.) This is the positive flip side of the use-it-or-lose it nature of the plan.

To make the deal sweeter, when you start at your new employer, you can start another medical FSA for the maximum amount and continue to submit expenses against that.

The Fine Print

There is one rule you need to be careful of: expenses have to be incurred while you are still covered under your old plan. So, in our example, if you quit your job on January 31st, the plan will only pay for medical costs incurred on January 31 or earlier. Depending on the plan, you may also have to submit receipts for reimbursement prior to your final day of employment.

This just takes a little planning. If you know you will be changing jobs, go on a spending spree to use up the full amount you elected to put away in your FSA. It can be hard to use up the extra funds solely from visits to the doctor (most elective surgeries do not qualify for reimbursement). However, look at the list of over the counter products that DO qualify:

  • Bandages
  • Blood pressure monitors
  • Cough medicine
  • Crutches
  • Alcohol swabs
  • Condoms
  • Eyeglasses
  • Non-cosmetic dental work
  • Saline nose sprays
  • First Aid kits
  • Reading glasses
  • Sunscreen
  • Lip balm with sunscreen

Those are just a few. A more detailed list can be found here. Your FSA plan administrator probably also has a list of all covered items. Most drug stores with pharmacies note on the receipt which purchases are eligible for FSA reimbursement.

So if you are planning on changing jobs, go a medical spending spree and use up all of your FSA funds, even those that haven't been deducted from your paycheck yet. And don't leave money on the table!


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