FSA when a retirement agreement has been put into place

Question

If I take advantage of retirement incentive in which I agree in November to retire effective June 30 of the the following year, can I may I make the same elections for the FSA as if no such irrevocable agreement existed. This assumes of course that the plan document and retirement incentive agreement are silent on the matter. If I elect to contribute the maximum $2550, spend all of it on qualifying expenses prior to June 30, and contributed only half of that amount, will I have just gained $1275 tax free dollars? Since the employer and I both know with certainty that I will retire mid-year, can they disqualify me from participation? Can they require accelerated contributions so $2550 will be paid in by June 30. It seems that there is an opportunity here to recoup some of my previous year's forfeitures resulting from the use of lose it provisions of the code. Is this just the flip side of that feature serving as an offset to use of lose it?

As I have continued to research my own question, it certainly appears that the uniform coverage requirements would make it possible for me to take reimbursements equal to my toal election of contributions. Since no restrictions exist in the retirement incentive agreement with regard to participation in FSA, no waiver of the benefit exists. I have not obtained/read the plan document, but it is highly unlikely that it contains anything about retirement incentives and agreements related to them since this offering was not anticipated when the plan was put into place. It may be something the employer could/should have considered as it offered the incentive, but I doubt that they did. It is also unlikely that most employees taking advantage of the incentive will be aware of this opportunity collect more prior to retirement than has been paid in. Since the employer reports all of my reimbursements for car allowances... as taxable fringe benefits and because I am subject to AMT I cannot recoup taxes paid on ligitamate business expenses repored in this manner, I have not ethical concerns about doing this. Additionally, the employer refused to allow for the incentive bonus to be paid into my 401k making it subject to my full marginal tax rate. If I can get a little of that back in this way, I feel more than justified in doing so.

Answer 1

There's no reason for the employer not to deduct the whole amount before you leave.

The FSA salary deduction has to be periodical, but it doesn't have to be calculated over a year. It just means that an equal amount will be deducted from your every paycheck, and if the employer (and you) know that your last paycheck is on June 30th even before the year starts - there's nothing to stop the employer from calculating the periodic payments so that it will cover your full FSA amount before you leave.

That is, of course, other than mere convenience (it may be easier/cheaper to just give you the extra $1275 than to deal with the special case deduction calculation).

This is different from unexpected termination/resignation, where the employer couldn't have made such an assumption and thus the periodic payments were calculated over a year.

See pub. 969. The selection is annual - the deductions are periodical.

Answer 2

While you have found a way to possibly gain $1275 in tax free income, you are also risking $1275 if you end up not using the money you contributed. You will have to find a way to have that much in medical expenses by your retirement date or you will leave some money in the Flexible Spending Account.

There are risks you take with these accounts (use it or lose it) and risks the company takes (leave with a deficit in the account). Many times we get questions about how to spend all that the employee contributed before the last day of work, or the end of the plan year.

You can play it more fair by selecting the maximum amount per check to be taken from your pay check, then waiting until the retirement date to decide how much you will withdraw from the FSA. Your last day of work is your last day to incur a medical expense but you are given a window to submit your claims that extends beyond your last day of work.

I have not personally heard of an employer requiring a former employee to pay back the money when there is a deficit in their FSA.

Remember people are fired, or laid off with little or no warning trapping their money in a FSA. The fact that you have the ability to plan for this event and considered your options, is a great position to be in.