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Employee Benefits Bulletin, January/February 2002TIDBITS, TRICKS & TRAPS IRS PUBLICATION 590 AND HEALTH FSA REIMBURSEMENTSAs stated in the "New Guidance" section of this newsletter, the IRS recently released a new version of Publication 502 (Medical and Dental Expenses) updated for the 2001 tax year. Publication 502 defines "medical expenses" for purposes of a deduction under Internal Revenue Code § 213 and is often used by cafeteria plan administrators to determine whether a participant's medical expense claim is reimbursable by his or her Health Flexible Spending Account ("FSA"). Publication 502 is an extremely useful tool for this purpose, however, care must be taken not to fall into a common trap-not every expense that is deductible under Code § 213 is reimbursable under an FSA. The two most common and most important examples of this trap are insurance premium payments and orthodontia expenditures. Insurance premium payments are deductible under § 213, yet they are specifically excluded as a permissible reimbursement under FSAs. Additionally, orthodontia expenditures cause much confusion. FSAs may only reimburse participants for medical expenses that were incurred during the FSA plan year. A claim is "incurred" only when the participant is provided with the medical care that gives rise to the expense and not when the participant is formally billed or pays for the medical care. Some orthodontists offer a discount on the total bill if all or most of the expenses are paid up-front. The up-front payment is deductible in the year it is paid under Code § 213, however, this is not the case for reimbursement from an FSA if the orthodontic treatment will last longer than the 12 month period of the FSA plan year. If the treatment will last longer than one year, the participant and orthodontist should determine the amount of the up-front payment related to services performed during the first year. Only this portion of the up-front payment is reimbursable. The participant is barred from reimbursement in the second year unless he makes another payment during that year. This special FSA reimbursement rule causes confusion and difficulty. However, some relief from the rule may exist. A 1997 IRS general information letter (although not binding on the IRS) indicated (in that case at least) flexibility on the part of the IRS for FSA reimbursements of up-front orthodontia payments. Back to Newsletter home |
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