Can You Contribute to an FSA After Taking a Hardship Withdrawal?

by Jack Ori

Many employers offer 401k plans, in which you invest pre-tax dollars for retirement, and flexible spending account, or FSA, plans, in which you pre-pay medical expenses throughout the year. You can take a hardship withdrawal from your 401k if you have a financial crisis, although you have to pay a penalty tax of 10 percent if you do so. Your 401k hardship withdrawal does not affect your FSA contributions, although you will not be able to contribute to your 401k for six months following the withdrawal.

Six-Month Moratorium

If you take a hardship withdrawal from your 401k, you may not make any more contributions to the plan for six months after taking the withdrawal. If your employer provides matching contributions to your plan, your employer cannot make any contributions to the plan during the six-month period that you are barred from making contributions to it. Once six months have passed, however, both you and your employer can contribute to the plan again.

Binding Contribution

When you agree to have money taken out of your paycheck for an FSA, you are bound to that agreement for the entire term of the plan, usually 12 months. You can only change this if you have a change in status such as getting divorced or giving birth to a child. Thus, you may have to continue contributing to your FSA even if you take a hardship withdrawal from your 401k and cannot contribute to it.

Unused Funds

If you have unused funds in your FSA at the end of the plan term, you usually lose the funds. Thus, it is important to estimate how much you are going to need to pay in medical expenses during the year. In most cases, you won't be able to change your contribution amount after you sign up for the FSA, so if you realize partway through the year that you are contributing too much, it'll be too late to change.

401k Loan

If you are having financial difficulties, you can take out a loan against your 401k instead of withdrawing money from it. You pay the loan back every pay period through an automatic deduction and do not incur penalties. The loan affects only your 401k, not your FSA, because FSA contributions are pre-determined by your election at the beginning of the plan year. You will be able to continue to contribute to the 401k even after taking a loan out,.

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