Question: Can an employee who terminates employment but still has money in his health flexible spending account (HFSA) continue to use it for claims? Or could that money be rolled over into his health savings account (HSA) with his new employer?
Answer: Internal Revenue Code § 125 regulations governing health flexible spending accounts (HFSAs) do not permit disbursements, transfers, or rollovers.
HFSA contributions can only be used to reimburse eligible expenses incurred while the employee is covered during the plan year (including any grace period or carryover period if the particular employer’s HFSA plan includes one of those provisions).
If the employee terminates, his or her HFSA coverage period ends unless COBRA continuation coverage is elected. For instance, if the plan year begins January 1 and your employee’s last day of employment is June 30, he may submit claims for eligible expenses incurred between January 1 and June 30 only. If, however, he elects COBRA to continue making HFSA contributions (on an after-tax basis), he may continue to incur claims eligible for reimbursement.
In summary, unused HFSA contributions cannot be cashed out nor rolled over to an HSA.