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Um, why did I elect FSA in COBRA?
Old 09-29-2011, 02:24 PM   #1
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Um, why did I elect FSA in COBRA?

I feel like a dope. I retired on July 1, at which point my healthcare FSA contributions stopped. When I saw FSA continuation was an available COBRA option, I took it.

But... why? I no longer receive a paycheck, so my FSA witholding isn't reducing any taxable income. I'm just mailing an FSA contribution check to my benefits administrator.

Am I missing something? Is there a way to retroactively apply the current FSA witholdings to previous earnings?

Thanks!
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Old 09-29-2011, 03:55 PM   #2
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I thought that FSA contribution reduces your pre-tax income.

Is a Flexible Spending Account Deductible? | eHow.com
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Old 09-29-2011, 04:14 PM   #3
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I thought that FSA contribution reduces your pre-tax income.

Is a Flexible Spending Account Deductible? | eHow.com
It does, but only as a part of payroll deduction through a Section 125 cafeteria plan. (This is also the same "section 125" that allows HSA contributions to be made before SS and Medicare taxes when taken from payroll deductions.) There is no tax deduction on the federal tax return for it -- all that happens is that the contributions are not included in your taxable W-2 income.

I don't believe there's any way to retroactively apply it to get a tax break for it. It appears the only good reason to take an FSA in COBRA is if you expect to have significant expenses later in the year which need to be reimbursed. Having said that, you *may* be able to get out of the FSA once you've used up just about all of your balance in the account. But if you have a significant balance of unused money in there for the year, I'd stick with it just long enough until larger, expected expenses came in -- and if you have no expected expenses that will use most/all of the FSA balance, consider moving planned expenses from future years into this year if you can.
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Old 09-29-2011, 05:27 PM   #4
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Not an FSA expert, but doesn't it earn income tax free

Also, you do not have to take the money out right now to cover expenses... I was in a class that talked about it and the guy had over $100K in an account and was collecting his bills which he paid out of pocket... said he could take the money out when he was in his 60s and needed it... the rules did not say WHEN you had to take it out...
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Old 09-29-2011, 05:52 PM   #5
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Maybe there is a little confusion between FSAs and HSAs. My employer has an FSA plan in which I participated that allowed me to use pre-tax money to pay expenses like deductibles, co-pays, and so on, but that money always had to be used up each year or was forfeited. I'd like to learn more about the subject as I am now starting to think about ways to cover these expenses in the future. I don't even know if I would be eligible for an HSA as (supposedly) my employer will be providing health insurance premiums until I am eligible for Medicare, and I seem to recall that HSA eligibility involves a high-deductible insurance plan (NB: I am ignorant about the details of HSAs, so don't take my comment on that as gospel).
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Old 09-29-2011, 06:06 PM   #6
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The only reason to stay in an FSA after you separate from employment is if you were not able to empty it before you left.

In my case I managed to spend all $5000 before I retired even though I separated in August and had only put a little less than $3000 in.

The COBRA paperwork made it clear that contributions after separation were on an after tax basis.
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Old 09-29-2011, 06:15 PM   #7
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I remember that FSAs are use it or lose it on an annual basis. My previous experience was that each year I figured out how much to put in the FSA and I had to use all of it by Apr 15 of the next year or else I forfeited the funds. HSA on the other hand rolls over year to year.

Am I remembering correctly and/or have things changed?
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Old 09-30-2011, 10:05 AM   #8
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Originally Posted by steelyman View Post
Maybe there is a little confusion between FSAs and HSAs. My employer has an FSA plan in which I participated that allowed me to use pre-tax money to pay expenses like deductibles, co-pays, and so on, but that money always had to be used up each year or was forfeited. I'd like to learn more about the subject as I am now starting to think about ways to cover these expenses in the future. I don't even know if I would be eligible for an HSA as (supposedly) my employer will be providing health insurance premiums until I am eligible for Medicare, and I seem to recall that HSA eligibility involves a high-deductible insurance plan (NB: I am ignorant about the details of HSAs, so don't take my comment on that as gospel).
Opps... my bad on my previous post.... I did mess up on which one it was....
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