We have a hand full of employees that have FSA accounts; with that being said we fund them up front at the beginning of the year. My question is what happens when an employee terminates before all the deductions are taken from them. I know we can’t make them pay the remaining balance but does that portion (balance remaining) now become a taxable benefit to the employee and need to be reported on the W2 somewhere? Thank you for your help, I really appreciate it.

Great question.

Once employment ends, the person cannot spend their FSA funds, but they do have 90 days to submit claims for FSA-eligible expenses that were incurred while employed and during the current plan year. Any unused money remaining at the end of the plan year is returned to the employer. If the worker was called to active military service during the FSA plan year, though, they are allowed to cash out the FSA balance.

Here is a reference: https://www.irs.gov/pub/irs-drop/n-13-71.pdf

Hope this helps!

March 2018