If you have any amount in your FSA at the time you lose your job and your health care coverage, your employer must offer you the ability to continue to have access by paying a COBRA premium. (Photo: Shutterstock)

Millions of people have lost their jobs or been furloughed because of the COVID-19 pandemic. Understandably, many people have questions regarding job loss and how that will impact their tax-free benefits including HSAs and FSAs. To help you navigate and manage your benefits during these uncertain times, the following are some frequently asked questions with some answers.

What happens to my HSA when I lose my job?

You continue to own your HSA after you lose your job. You may take distributions from your HSA if you want or need to;  it's your decision. If you continue to be covered by an HSA-compatible high deductible health plan (HDHP) you can continue making contributions to your HSA.

Related: 5 ways the CARES Act affects HSAs, FSAs and HRAs

What are the tax consequences of an HSA distribution after you lose your job?

Distributions from your HSA are tax free if those distributions are used to pay or reimburse you for qualified medical expenses. Distributions from your HSA used to pay health insurance premiums are tax free for (i) HSA owners age 65 and over, (ii) COBRA beneficiaries, and (iii) individuals receiving unemployment compensation. If the distribution is not used for qualified medical expenses or for health insurance premiums for the individuals described above, then the distribution will be taxed as income. A 20 percent additional tax is also imposed if you are not disabled or are not eligible for Medicare (currently age 65).

Can I use my HSA to pay premiums for my employer-provided HSA-compatible HDHP after losing my job?

If you lose your job and as a result you lose employer-provided health insurance coverage, you are then eligible under COBRA to continue that coverage by paying the full premium for that coverage. Since you are a COBRA beneficiary, the distribution from the HSA to pay for the COBRA premiums is tax free. If the HDHP was not employer-provided coverage, you are not eligible for COBRA for that coverage. Consequently, you may only take a tax-free distribution from your HSA to pay for the HDHP premiums if you are receiving unemployment compensation

What happens to my FSA when I lose my job?

The rules are different for FSAs than for HSAs. Generally, an FSA is a group health plan and, in most cases, if you have any amounts in your FSA at the time you lose your job and your health care coverage, your employer must offer you the ability to continue to have access by paying a COBRA premium.

This COBRA option, however, is generally limited, as long as the FSA is considered an "excepted benefit" as most are. If your FSA is an excepted benefit, then your FSA can be continued under COBRA for the remainder of the plan year (not for the full 18 months as with other employer-provided health plan coverage). Also, in this case, the employer does not have to offer COBRA continuation of FSA at all if the cost to continue the FSA for the rest of the year is more than or equal to the unspent balance in your FSA (i.e., it is "overspent"). If the FSA is not an excepted benefit, the employer will need to offer COBRA continuation of FSA–irrespective of whether it is over- or underspent-–for the full 18-month maximum COBRA period.