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.

The COBRA premium is calculated as the amount of the contributions you were to make to the FSA for the rest of the year and any employer contributions to the FSA. As a result, many individuals decide not to pay the COBRA premium for continuing to have coverage under the FSA for the rest of the year, unless they have a large unspent balance in their FSA when they lose coverage.

Let's say that you had elected to have $100 a month taken out of your salary on a pre-tax basis and put in an FSA ($1200 for the year). At the time that you lost coverage, you had not used any of the amounts in your FSA. If you lost your job and coverage in March, after having contributed $300 to the FSA in the first three months of the year, your COBRA premium for the FSA would be $100 per month–plus a 2-percent administrative fee–for the remainder of the year. If you lost your job and coverage in November, your FSA balance would be $1,100 and you would have to pay an additional $102 to continue to use the FSA in December. If the FSA allowed for a $500 carryover of unused FSA amounts into the following year, you would be able to use up that $500 in the following year without paying any more COBRA premiums.

If I elect COBRA to continue using my FSA, what expenses can be paid for?

The FSA may only be used to pay or reimburse you for qualified medical expenses.

If I elect COBRA to continue using my FSA, can I use my FSA to pay for COBRA premiums for the health insurance coverage I lost?

No, unlike HSAs, FSAs cannot be used to pay for health insurance premiums.

William Sweetnam is the legislative and technical director for ECFC, a non-profit organization dedicated to maintaining and expanding employee benefit programs on a tax-advantaged basis.

Read more: 

• HSA, retirement, and tax deadlines cheat sheet
• COBRA continuation benefits: Furlough vs. layoff
• New bipartisan bill would allow use of both HSAs and FSAs