If I leave my job, what happens to my flexible spending account?

Question

I am about to decide how much money to set aside for my 2013 Flexible Spending Account (FSA). (The max this year is $2500.) But I am wondering what happens if I switch employers during the year. Does the FSA from one employer somehow roll over to the new employer? Is it completely separate? Consider a couple possible scenarios.

Scenario A

Separate FSAs. I spent my entire election.
I elect to put $2000 in my FSA. I spend all $2000 in the first four months of 2013. In July I start a new job for a new employer. It's midway through the year so they have only taken $1000 out of my weekly paychecks.
Q1: Do they take $1000 out of my final paycheck?
Q2: How much can I elect to put in the FSA at the new employer? (Can I bump it up to the $2500 limit?)

Scenario B

Separate FSAs. I underspent all my election.
I elect to put $2000 in my FSA. I spend $600 in the first four months of 2013. In July I start a new job for a new employer. It's midway through the year so they have only taken $1000 out of my weekly paychecks.
Q1: Do they take $1000 out of my final paycheck?
Q2: Do I lose any of the unspent $1400?
Q3: How much can I elect to put in the FSA at the new employer? (Can I bump it up to the $2500 limit?)

Scenario C

Coupled FSAs.
I elect to put $2000 in my FSA. I spend $600. They have taken $1000 out of my paychecks. All that info somehow makes it to my new employer so they give me credit for having $400 in my FSA. Over the rest of the year they plan to take the remaining $1000 out of my paycheck.
Q1: Am I allowed to make an upward/downward adjustment in my election amount? (Can I bump it up to $2500? Can I bring it down to say $1500?)

So many possibilities! Can anyone shed some light on how this works?

Answer 1

Edit: Let's forget about Wikipedia. From the horse's mouth:

The cafeteria plan rules require that a health FSA provide uniform coverage throughout the coverage period (which is the period when the employee is covered by the plan). See Proposed Treasury Regulations Section 1.125-5(d). Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. This means that the employee’s entire health FSA election is available from the first day of the plan year to reimburse qualified medical expenses incurred during the coverage period. The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have contributed up to any particular date, such as the date the employee is laid-off or terminated. Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of lay-off or termination, the employer cannot recoup the difference from the employee.

(emphasis added)

http://www.irs.gov/pub/irs-wd/1012060.pdf

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Uniform Coverage Rule

The IRS has required that “health FSAS must qualify as accident or health plans. This means that, in general, while the health coverage under the FSA need not be provided through a commercial insurance contract, health FSAS must exhibit the risk-shifting and risk-distribution characteristics of insurance.” This concept has led to the “uniform coverage” rule.

The uniform­coverage rule requires that the maximum amount of an employee’s projected elective contributions to a health FSA must be available from the first day of the plan year to reimburse the employee’s qualified medical expenses, regardless of the amount actually contributed to the plan at the time that reimbursement is sought.

Citing proposed Treasury Regulations Section the IRS General Counsel has determined that:

“Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have contributed up to any particular date, such as the date the employee is laid-off or terminated. Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of or termination, the employer cannot recoup the difference from the employee.”

This rule is unfair and also constitutes a disincentive to establishing FSAS because of the exposure to out-of pocket expenditures arising from employees who leave the company.

NSBA believes that the uniform coverage rule should also be revised if the or lose- it rule is changed. Revising the use-it or lose-it rule while leaving the uniform coverage rule unchanged will introduce an inappropriate asymmetry to FSAS. An employer should be allowed to deduct any negative amount arising from insuftîcient employee contributions from a terminating partieipant’s last paycheck.

http://www.ecfc.org/files/legislative-news/NSBA_(David_Burton).pdf

(emphasis added)

Now, that's some fresh bitterness for you right there. (Dated August 17, 2012)

Answer 2

Scenario A:

• Collected $1000; yet to be collected $1000; spent $2000.
• The company will not collect the extra $1000. They fund it from the money that people forfeit in other years.
• You can open a FSA with the new company for $500. This would fall under the life event exemption regarding changes to plans. Most companies will allow a new employee to start an FSA in the middle of the year.

Scenario B:

• Collected $1000; yet to be collected $1000; spent $600.
• The company will not try and collect the extra $1000. They will have made a profit of $400 on you this year.
• Spend all that you can before the last day of work. Buy glasses, look at the rule regarding nonprescription items.
• You can open a FSA with the new company for at least $500 and maybe as much as $1500. This would fall under the life event exemption regarding changes to plans.
• You might not want to put the entire $1500 into the new plan if you bunched up expenses to minimize losses with company A.

Scenario C:

• Collected $1000; yet to be collected $1000; spent $600. Company A sends money to company B.
• Not going to happen. It might happen if company A and B were merging, or one was buying the other, or if one was a subsidiary of the other. Otherwise why would Company send $400 in profits to company B.
• This now changes to scenario B.

I have been in both scenario A and scenario B. The new companies had no problem with me opening an FSA under their program.

Answer 3

A) Q1) No, you beat the system, you benefit from flip side of 'use it or lose it' Q2) You need to ask, they may have a $50/week limit, or they may divide the amount you wish by remaining time in year. They may also not let you start till next enrollment period.

B) Q1) No, in fact, you just lost $400 that you deposited but didn't spend. Q2) You missed the opportunity to spend an extra $1000 as well, but the loss was opportunity not pocket. Q3) Same as Q2 above, ask them.

C) These accounts are not coupled. I'd change the law to do so, however, I am not a congressman.