If you are going to finally ditch the rat race and will be retiring with an FSA at your job, then you have some things to get right before your retirement date. Failing to do so means losing everything in your FSA account. Do it right and not only can you use up all you have contributed but even more than you have paid into it for the year.

An FSA (Flexible Spending Account) is a fairly common employment healthcare benefit that many companies offer their employees. Most people are familiar with the FSA “use it or lose it” rules that apply to your account at the end of every year. It is why some employees decide not to participate in this nifty tax-free health benefit. But if you have an FSA now and are planning to retire this year, or haven’t used an FSA but do plan on retiring after the first of next year, then you may want to keep reading. You can leverage your FSA to the fullest in the year you retire and even get more money for qualified FSA medical costs than you paid into your FSA.

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Don’t Lose Money When Retiring With An FSA. Be Smart And Leverage It To The Max

How The FSA Works

You set aside money through your employer pre-tax. It’s to be used on qualified medical expenses that your health insurance doesn’t cover. Employer benefit enrollment activity usually heats up in October thru November. That is when you commit to wanting an FSA and how much money up to the federal FSA limits you want to commit to it for the next year. For 2020 that limit amount is $2750 (update–For 2023 that limit amount is $3050). The employer then takes an equal amount out of each of your paychecks throughout the year. For example, if you decided to contribute $2750 to your FSA for the year, then having a biweekly paycheck schedule means $105.76 will be deducted before taxes from each check.

You are allowed to spend FSA funds in advance of your contributed money, right up to your committed FSA contribution amount for that year. For example, if in March you incur FSA qualified medical expenses for $2000 but only have 3 months ($635) of payroll FSA contributions so far, you can still use your FSA funds to pay the full $2000.

This FSA money is normally only good to use until the end of year (small extension may apply) and any unused money reverts back to the employer. That’s the “use it or lose it” part of the FSA. However, the FSA is handcuffed to your employment. When you retire you are quitting your job and the FSA ends on your last day, not the end of the year. Any unused funds in your FSA reverts back to your employer on the day you skip out the door for the last time. So don’t do that!  Get smart and plan ahead.

Retiring With An FSA And Spending More Than You Contributed- The FSA Loophole

Retiring right means you probably have an idea of when you want to retire. This is an advantage because it gives you time to strategize your medical treatments and other FSA qualified spending before your magical date. The way the FSA loophole works in your favor is that even though you may retire before the end of year, you can spend up to your yearly committed FSA amount in advance and not have to pay back the amounts spent above what you have contributed. The earlier in the year you retire the more you can benefit. (Update 2022: In rare cases, FSA plan documents specify that any remaining contributions can be taken from your last paycheck when you leave your job. Check with your employer regarding their FSA rules)

For example, retire in June and spend up to your committed full year FSA amount before you leave. By June you have only contributed half of your yearly FSA commitment but you can spend the entire year’s amount. Meaning you just doubled your money. The rules that allow your employer to keep any unspent FSA funds every year also means your employer has to eat any departing employee’s FSA deficit when they retire.

Don’t feel bad that you are stiffing your employer. A lot of employees don’t manage their FSA funds very well and lose their remaining balance. Unused FSA funds total in the hundreds of millions of dollars each year. Your company will be using these kinds of yearly forfeited funds that they get to keep to cover your taking advantage of the FSA loophole. Believe me, no company executive will get their bonus trimmed because of this.   

Pre-retirement FSA Spending Strategy

Take advantage of the time you have before your retirement date. It is best to start this long before announcing your retirement. There are lots of ways to use your full FSA funds. Even if you are healthy and without pending health issues to take care of. Basically, all the things you might try to spend your FSA money on before the end-of-year deadline qualifies for this FSA pre-retirement strategic health spending.

• Get up to date on your medical checkups. There are always things in wellness checkups that will cause costs that insurance doesn’t cover.
• Get your eyes checked or at least get those new glasses and/or contact lenses you will be needing. Get as many as you think you might need.
• Go to the dentist. We all know how much implants, crowns and bridges cost. Dental Insurance usually just takes the sting out of the bill. Non-cosmetic dental work is covered under FSA. Now would be the time to take care of all dental issues that you have put off.
• Back problems? Fasciitis or Tendinitis? If you want to visit a Chiropractor to help heal your back, now would be the time to try it. Acupuncture is also something that may help hard to heal issues. Qualified medical issues are covered under FSA, a prescription or letter of medical necessity may be required.
• Orthotics are a qualified medical expense. It never hurts to get another set of inserts. Think about your upcoming time on your feet doing retirement activities.
• Replace, update, or expand your first aid kit. An adventurer level first aid kit can be expensive but worth every penny in an emergency situation. Most anything you would normally store in your medicine cabinet can be bought with your FSA funds. Stock up on bandages, a good thermometer, blood pressure monitor, heating pads, etc.  

Remember, anything that qualifies for FSA spending while an employee before the end-of-year deadline will qualify for your pre-retirement FSA spending strategy. Choose merchants that can process your FSA card. One online merchant to look at is the FSA Store.

If you are retiring with an FSA, then plan ahead and leverage it to your utmost advantage.

Don’t leave anything on the table. In fact, take it to the limit. Depending on your planned retirement date, double or triple your money. If you haven’t been using your employer’s offered FSA health benefit thus far and will be retiring after the next enrollment period, consider starting an FSA and set yourself up before you retire.

Retiring or not, always check for all qualifying FSA expenses that you may need. Utilize your FSA funds before your “use it or lose it” deadline. Whether that is end-of-year or your last and happiest day on the job.

Update 11/5/20: For those retiring and signing up for their employer Cobra insurance coverage. Your FSA may also be extended past your employment date with Cobra. Do your research to see if this will apply to you.