"new" eligible FSA expenses?

[jmor99]

I have been hearing of some "new" eligible FSA expenses such as cough syrup, bandaids, otc Clariten, etc.

Is this correct? Even if true, mustn't it be prescribed by a doctor? Is there a new IRS bulletin to this effect for 2006? Didn't see anything like this in Publication 502 for 2005 returns.

Thanks!

[Guest JerseyGirl]

This information does not appear in Publication 502, but if you go back to September 3, 2003 and check out Revenue Ruling 2003-102, you will find what you seek. The IRS changed it’s stance on the eligibility of certain over-the-counter medications in this ruling, but has never provided any good reason as to why the sudden change of heart. No prescription is necessary if the product is for the treatment or prevention of a disease or condition—so aspirin and cold remedies are now eligible expenses, but things like vitamins and shampoo are not (unless of course, they are in fact prescribed). In order to permit the reimbursement, plans must have been amended to allow the OTC products as eligible expenses. Not all plans were amended, so you will need to check the SPD to know for sure on a case-by-case basis.

[oriecat]

This is a "Note" in the 2005 Pub 502 that pertains to this:

http://www.irs.gov/publications/p502/ar02.html#d0e1776

"This rule applies only to the deduction for medical expenses. It does not limit reimbursements of medical expenses by employer-sponsored health plans that reimburse the cost of both prescription and nonprescription medicines."

[jmor99]

Thanks, JG and oc. I've read both RR2003-102 and 2003-58. I must still be missing something. I see where 102 states these kinds of expenses are eligible under Sec. 105, but how is the leap made to section 125? Does an FSA fall also under sec. 105? Does sec. 125 reference 105 as well as 213? I assume this is what you mean that the plan must be amended to also reference sec. 105 eligible expenses.

I think I'm starting to see the light, but I'm not sure. If this is the answer, they I owe the both of you for turning on my light bulb!

[oriecat]

Section 125(f) defines the qualified benefits for cafeteria plans. It says:

"For purposes of this section, the term “qualified benefit” means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106 (b), 117, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section 79 and such term includes any other benefit permitted under regulations. Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance."

So I'd say yes, 125 references 105 (not specifically, but it doesn't exclude it), so since they are allowed under 105, then they can be allowed under a 125 plan. I hope that helps.

[Bob R]

So I'd say yes, 125 references 105 (not specifically, but it doesn't exclude it), so since they are allowed under 105, then they can be allowed under a 125 plan. I hope that helps.

Just to clarify - 125 doesn't actually "provide" for any benefits other than a tax benefit. In general terms, it allows you to "buy" certain benefits on a tax free basis. It's the other code sections that allow the "purchased" benefits to be paid tax free.

Section 105 is for health benefits. In essence, it permits payments from a health plan to be excluded from income. The health benefit could be a typical insurance policy or a self-funded health plan -- which is where a health FSA comes in. You use 125 to reduce your comp pre-tax and you are purchasing coverage under a health FSA (even though it's generally buried in the same plan document that includes the 125 feature). When the health FSA provides a reimbursement, that reimbursement is excludible from your gross income due to code section 105 (and I'll admit, I generally mix up section 105 and 106 - one section permits an employer to provide health coverage without an inclusion in income of the value of the coverage and the other allows actual payments from the coverage to be excluded from income).

[jmor99]

One last question: If I read these responses one way, then I suspect I need to at least change my SPD and maybe amend the plan doc. On the other hand, perhaps I can leave them as is, since the inference is already built in. What's your best advice?

Thanks to all for clarifying all of this.

[oriecat]

I think it will depend upon what your plan doc and SPD already say.