Flexible Spending Account Credits

[Guest Grumpy456]

What general tax rules apply to flexible spending accounts (FSAs) that incorporate credits? For example, Smithco provides its eligible employees with credits based on service. For 2005, Jerry, an eligible employee, has 1,000 credits. His employer-sponsored health coverage for the year is valued (by Smithco) at 800 credits, his dental coverage for the year is valued at 300 credits. Jerry uses 800 of his 1,000 credits to cover his health coverage and uses the remaining 200 credits to partially cover his dental coverage. Excess credits, had there been any, are forfeited. He pays for the remainder of his dental coverage through Smithco's medical reimbursement plan using pre-tax dollars. Smithco's FSA is not part of a Code Sec. 125 cafeteria plan. It seems to me that so long as Smithco's FSA satisfies Code Sec. 105, the value of the credits Jerry has been given is not includible in Jerry's income. Is that conclusion correct and, if not, why not? Thanks so much for your help.

[Guest gdburns]

See other Forum.

[jmor99]

I don't think section 105 allows an employee to use pre-tax dollars or salary reduction, does it? 125 does.

I don't think your question has anything to do with whether or not you call it credits or dollars.

[QDROphile]

I agree that paying for dental coverage through a medical reimbursement plan with pre-tax dollars is confusing and appears to problematic if the MRP is the FSA and is not part of a section 125 plan. Pre-tax dollars is understood to mean salary reduction dollars.