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Flexible Spending Account Information

1.         What’s a Health FSA?  What’s a Cafeteria Plan?

2.            For whom can medical expenses be reimbursed under a medical FSA?

3.            What expenses can be reimbursed under a medical FSA?

4.        IRS Publication 502 Medical Expenses

5.            What over the counter medications are reimbursable under my Flexible Spending Account

6.            Status Change Matrix

 

  • What’s a Health FSA?  What’s a Cafeteria Plan?

    A Medical FSA is a plan, under which employees can be reimbursed, on a pre-tax basis, for medical expenses that aren’t covered by insurance or any other arrangement.  Insurance co-pays, deductible, eyeglasses and orthodontia are common examples of expenses that can be reimbursed under a health FSA.

    The Medical FSA offered by your employer is probably part of a “cafeteria plan.”  Under a cafeteria plan, you can elect various benefits, like health FSA benefits, and pay for those benefits with pre-tax salary reductions (or with employer credits, if your plan has them).

    With a salary reduction cafeteria plan, you agree to reduce your salary by a certain amount for the plan year.  In exchange, you get medical FSA coverage for the year.  In essence, you are trading taxable salary for tax-free reimbursements of medical expenses.  You save taxes and end up with more take-home pay.  Because the salary reduction occurs before taxes, you save income taxes and Social Security taxes (FICA) on those amounts.

Example:  How FSA Reimbursement Saves You $$$. 

Melissa an employee of ABC Company participates in the medical FSA offered under a cafeteria plan. She elects to reduce her pay for 2005 by $200 per month.  If Melissa is in a 34.65% tax bracket (27% federal + 7.65% FICA) she saves $832 on taxes by getting her family’s medical expenses reimbursed through the health FSA. There may be state income tax savings too.

 

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The only people whose medical expenses can be reimbursed under a health FSA are you (if you’re a participant), your spouse and your dependents.  The tax laws provide who fits in those categories.

Tip:  Make Sure You Know Whose Expenses Are Covered.  Your employer’s health FSA may not cover the expenses of everyone that the tax laws allow.  For example, your health FSA may only cover expenses of children living at home.  Check your plan documents.

 

 Participant

Your medical expenses can be reimbursed if you are an employee who has enrolled in the health FSA.  Working for a company doesn’t always mean that you’re eligible to enroll.  You check with your Human Resource representative.

 Spouse

 Your spouse’s eligible medical expenses can be reimbursed if you and your spouse are of the

 opposite sex and were considered to be married under state law when the medical services

 were provided.

 Dependent

 You can also be reimbursed for your dependent’s medical expenses if he or she qualifies as

 your dependent under the tax laws (a “tax dependent”).  A person generally is your tax

 dependent if:

       *He or she is either a relative or lived with you for the entire year as a member of your   

        household;

       *You provided more than half of that person’s total support for the calendar year; and

       *He or she was a U.S. citizen or resident, or a resident of Canada or Mexico, for part of

        the calendar year in which your tax year began.

 

To keep things simple, we use the word “dependent” herein.  But remember that this means “tax dependent” as described in this subsection.  Remember also that your plan document may define dependent more narrowly.

Your “relatives” include natural and adopted children, parents, grandparents, stepchildren, stepparents, siblings, aunts, nieces, nephews, uncles, cousins and in-laws.  Persons who aren’t your relatives (such as foster children and step grandparents) may also qualify for reimbursement, but only if they live with you for the entire year as a member of your household (and the other conditions described above are met too).

For a dependent’s medical expenses to be eligible for reimbursement, he or she must have been your dependent at the time the medical services were provided.  You can include the medical expenses of anyone who is your dependent even if you can’t claim an exemption for that person on your tax return.

Are you divorced or legally separated?  If so, you and your ex-spouse (or current spouse if you’re separated) can both be reimbursed for your child’s medical expenses, so long as one of you can claim your child as a dependent under the tax rules.

Your domestic partner’s medical expenses can only be reimbursed if he or she is your dependent or, if the partner is of the opposite sex, that person is your spouse.

 

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Your health FSA can only reimburse expenses that are for “medical care” and are not excluded

 by your health FSA.

 What Does “Medical Care” Mean?

           In order for an expense to be considered “medical care” under the tax laws it must:

  1. Diagnose, cure, mitigate, treat or prevent disease, or affect a structure or function of the body;

  2. Be primarily to prevent or alleviate a physical or mental defect or illness;

  3. Meet special rules if it’s also a personal item or lasts more than a year; and

  4. Be primarily for and essential to medical care if it involves transportation or travel.

           Each of these requirements is explained further below.

Examples:  Medical Care.  Medical care can be in the form of goods (such as medicine, drugs, wheelchairs or crutches) or services (such as doctor exams, operations and orthodontia treatment).

 

          

Also, the care must not fall under any of the prohibited categories.

 

 1. Care must diagnose, cure, mitigate, treat or prevent disease or affect any structure / function of the body.

 

“Diagnose” means using any procedure to find out whether someone has a disease or dysfunction.  Hearing, vision and blood tests, CT scans, and urine analysis are all examples of diagnostic tests.  “Cure” means a medical treatment or drug used to restore health, such as using chemotherapy to cure cancer.  For care to “mitigate,” it must make a medical condition less harsh or severe.  Examples include a wheelchair if you have multiple sclerosis and a seeing eye dog for your blind child.  “Prevent” requires that the care involve the immediate and proximate prevention of a disease, defect or illness, and that the disease, etc. be imminent.  An example would be if your doctor prescribes an antibiotic to prevent infection from an animal bite.

 

Examples of expenses for the purpose of “affecting any structure of the body” include operations or treatments affecting any portion of the body, such as obstetrical services and X-rays.

 

Must the Treatment Work for Its Cost to Be Reimbursed?  No.

2. Care Must Be Primarily to Prevent or Alleviate a Physical or Mental Defect or Illness.

Care must also be primarily to prevent or alleviate (to make less harsh or severe) a physical or mental defect or illness (we call this primarily-for-medical-care rule).  Items that typically qualify are:  hospital, nursing, medical, laboratory, surgical, dental and other diagnostic and healing services; X-rays; and medicine and drugs.

Can I Be Reimbursed for an Expense That Just Improves My General Health?  Generally, no.  There must be an existing disease or imminent probability of incurring a disease. 

For example, if your doctor tells you to join a weight-loss program, its cost won’t be reimbursable unless losing weight is primarily for a specific medical condition, such as obesity or hypertension. This is sometimes called the “you must be sick before you can get well” rule.  But there are some exceptions.  Costs of immunizations, flu shots and annual physicals are reimbursable even if they are for a healthy person.

3. Care for Personal Purposes Must Not Have Been Obtained “But For” the Medical Condition.

What happens if the care received for medical reasons is normally thought of as a personal, living or family expense?  In that case, the item (or service) is only reimbursable if it wouldn’t have been obtained “but for” the medical condition.  (It must still meet the primarily-for-medical-care rule too.) 

For example, the cost of a reclining chair prescribed by a doctor to help your wife get rest for a cardiac condition may be reimbursable if the chair wouldn’t have been bought “but for” that condition.  Many personal expenses don’t meet this difficult test. 

For example, the cost of dancing lessons to relieve your dependent aunt’s scoliosis generally aren’t reimbursable.

4. Certain Capital Expenses May Not Be Fully Reimbursable

Sometimes, an item obtained for medical care continues to be useful for a long time (called a capital expense).  How much you can be reimbursed for a capital expense depends on whether it serves a personal purpose and whether it is permanently fixed to your property. If the capital expense is a special version of something normally thought of as a personal item, then only the increased cost of the special version is reimbursable. 

For example, buying orthopedic shoes so that your child with cerebral palsy can walk would be a medical expense.  But reimbursement would be limited to the difference between the cost of orthopedic shoes and the cost of regular shoes. 

 A health FSA can reimburse a capital expense that has no personal element and that is not attached to your dwelling, if it is used by the sick person only.  Examples include artificial teeth and limbs, a wheelchair and crutches. A capital expense that is permanently attached to your dwelling (such as home improvements or special equipment) is reimbursable if its main purpose is medical care.  But you may be reimbursed only to the extent that the improvement cost is more than the increase in property value.  If it doesn’t  increase the property value at all, then you can claim all of the improvement cost.

 

Example:  Permanent Improvement.  Mary added an elevator to her house because the doctor recommended it for her husband’s heart condition.  The elevator cost $1,000 but only increased Mary’s property value by $800.  She may request reimbursement of $200.

 

 

If the improvement or special equipment is used by the sick person and others, only the prorated portion of the expense for the sick person is recognized.  Also, a health FSA may reimburse the costs of operating or maintaining a capital expense, so long as the medical reason for the original purchase still applies (such as repairing a wheelchair for a dependent with multiple sclerosis).

 

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Medical Reimbursement Account Information - IRS Publication 502 PDF

This IRS Publication's primary purpose is for income tax filing. Some items listed in this publication can not be reimbursed through your Medical Reimbursement Account. This is for informational purposes only. Please check with your administrator or Summary Plan Description for more information. Please remember that not all items may be reimbursable under your plan
 
 

For general information e-mail: info@mybci.com Telephone: 248.626.8896 Fascimile: 248.626.8185  BCI Administrators, Inc. All Rights Reserved 2000

Last modified:11/28/2007