Can my former employer reimburse my FSA expense due to their error?

Question

Ok, so this is a bit convoluted. To be clear, this is not a "use it or lose it" question, nor is it a question of overspending contributed amounts before leaving (I'm well aware of how all that works).

I left my previous job in March of this year, and asked my HR team how long I had to spend out the remainder of my FSA contributions (about $1300 by the time I left). They verbally told me that I had 30 days to spend, and followed up after double checking with the plan provider (TASC) with an email that said the same—30 days from my last day was the last day to spend. It's also on the bottom of my benefits termination paperwork: "Note: FSA balance must be spent within 30 days of your last day worked or the remaining balance will be forfeited."

Since I was in the process of moving out of state, that was convenient—I spent a little under $1000 on day 25 in my new town on things like vision exams, a year supply of contacts, a pair of backup glasses/frames, etc. (all eligible expenses). When I submitted for reimbursement, the claim came back denied as out of plan period. I contacted the HR department there, and they said they'd follow up. About a week later, they told me that TASC was now saying something different—but they were going to try to make them reimburse the expense because they were the ones who provided the incorrect information.

Fast-forward to today, about 3 months and many follow-ups later. Since then, TASC refused to reimburse, says the notes on the file didn't say what was said, and denied my former employers request to review the recording of the call where that was supposedly said (they supposedly left TASC over the way this was handled). My former employer says that even though I acted in good faith and they provided me the incorrect information, they can't reimburse me because they "would have to change everyone's W-2s and make everyone's contributions non-tax-exempt" and it would "violate the plan terms and endanger the pre-tax protection of that money for all of the employees." They say I have no other options, and no other recourse.

To be clear, I'm on good terms with my former employer . . . but it seems to me like regardless of who was at fault, I acted in good faith, have it in writing, and should be able to get those funds reimbursed SOMEHOW.

So this is really a few questions:

1. Would reimbursing an employee for an error like this actually endanger their plan or require them rolling back the contributions of other employees? I can't find anything even alluding to this online or in review of applicable legal/HR info.
2. What are my options from here? (I'd really like that thousand bucks, especially knowing that they get to profit from their mistake and roll my funds into their plan expenses)
3. If #1 is in fact the case, is there precedent where they could reimburse me with taxable funds just to correct their policy/clerical error?

Answer 1

This is an unfortunate situation for you. You have zero chance at your question number 1, if someone was going to bend this rule for you it would have happened already. The answer to question number 2 is pursue solution number 3.

The overriding issue is that the IRS makes these rules, not the employer/plan sponsor or the administrator. You can't talk the plan administrator in to reimbursing you, their system likely doesn't even have a function to do so.

FSA timing issues can be complex and I think that's the root of your issue because when an expense can be incurred (date of service versus date of payment) and when a claim must be filed are different things. It's really common to bend the rules on when a claim is submitted, but not when it was incurred.

It's really common for an exiting employee to have 30 days to submit expenses for reimbursement. FSA expenses must always be incurred within the specified plan year, or within your dates of employment if you weren't employed for the entire plan year, this is specified by the IRS. It seems like some wires were crossed when you asked this question. You were asking "can I still incur claims" and they were hearing "how long do I have to submit an expense that has already been incurred."

Some plans allow COBRA continuation on FSA which generally does not make sense. Your contributions to the plan would use after tax dollars but for folks who know they have an eligible expense coming it can make sense to continue via COBRA in retain your eligibility under the plan so you can incur a claim after your employment termination.

Regarding number 3. This sort of reimbursement would be outside the plan, no precedent is necessary. You've gotten them to claim it was their mistake, they're going to reimburse you for their mistake, it has nothing to do with the FSA.

Good luck.