Reimbursement of PreApproved (but not provided) Medical Care

[Guest RCR266]

I have an employee who stopped participating in our medical FSA due to qualified change in status. He has a balance remaining in the account and no pre-termination medical costs to see reimbursement for. He did have pre-approval for medical care from his physician before terminating, but was unable to actually receive the medical treatment before he terminated participation in the FSA. Can he seek reimbursement under the FSA for the pre-approved treatment he received after his participation stopped?

[jpod]

Doesn't your plan say that the expense must be "incurred" while the employee is participating in the FSA? Just out of curiousity, why do you allow employees to drop out of your medical fsa mid-year? You are inviting them to use up the full year's allotment and then leave the employer holding the bag.

[papogi]

jpod, it is true that employers do not have to allow changes to FSAs due to qualified status changes as outlined in 125-4. However, the vast majority of plans do recognize these changes in status, and would allow a reduction or stoppage of an FSA if an employee experiences and qualifies status change, and the election change is consistent with the status change. I think you made it sound as if RCR266 has an unusual plan in that it allowed the participant to stop the account, and that plan design is unusual.

Still, jpod does offer up something that plans should at least consider. Employers are not required to honor status changes as outlined in 125-4.

[jpod]

Papogi: Vast majority? You think? Maybe you're right, but as far as I can recall the technique of not allowing mid-year changes was something that was widely discussed as soon as the proposed regs. came out in 1989.

[Guest RCR266]

Thanks for your responses. We only allow these changes in very limited circumstances, consistent with reg. 125-4. In this case, a work status change resulted in the termination of participation. We do have the "incurred" language in our SPD, but what exactly does that mean? Most resources indicate that the IRS defines "incurred" as when the services were provided, but when I look at IRS Publication 502 it seems to say that they're "incurred" when paid for. Any thoughts?

[papogi]

That's one of the major differences between Pub 502 and how FSA's operate. 502 applies to Schedule A on your taxes, and is based on when things are paid. FSA's look at the incurred date, just as any "insurance" would.

jpod, maybe it is a regional thing, not sure. I work for a national TPA, and over 95% of our flex clients (we have dozens of them) allow mid-year changes such as this. Back in my years as a Flex Supervisor, we never had a client have an Experience Loss at the end of the year, even with the few employees who might have played the system to get out more than they put in.

[LRDG]

Incurred expenses (with respect to Sec. 125s), must be paid and services performed within the same plan year. If either date of payment or dates of service are in a prior or subsequent plan year, the expense is not eligible for reimbursement in any plan year.

I have to agree with papogi on both issues. Publication 502 (and 503? for dependent care) should not be relied on by either plan sponsor or participants for accurate Sec. 125 plan info. They provide more accurate information for individual income tax filers.

With respect to plans allowing status changes, I have encouraged clients to allow qualified changes and supported the recommendation with documented end of year reports over a number of years and hundreds of plans. Employer tax savings have always far exceeded 'excess claims'.

Our plans that limit status changes have struggled with low participation, without eliminating the risk of a participant claiming more than their contribution. Any client that I would recommend limiting status changes to would be for instance, an organization/industry experiencing high employee turn-over. Not the ideal company to sponsor a Sec. 125 plan, but we take our clients as they are.

[Bob R]

Allowing a change in status elections on a health FSA is something that has always troubled me.

I understand the fact that many employees won't elect to participate if they are locked into an annual election. However, it's just not clear how you handle a change.

For example, suppose someone elects $1,200 for the year. After 6 months the employee elects to go to $0. Presumably, if the employee had incurred $1,200 of expenses, the employer is out $600. This may be theoretical as many people haven't experienced this situation. What's more likely is that employees don't really understand how the rules work. Or, they understand but they don't want to stiff the employer if they are still working there.

But, suppose the employee wants to increase a prior election mid-year (e.g., in my example he/she wants to increase to $2,400 in July). Is the amount taken out per month beginning in July $200 or is it $300? I believe some folks at the IRS considered this 2 periods of coverage whereby a person could get reimbursed $1,200 up to July and could get reimbursed $2,400 after July. That never made sense to me - so assuming the increase to $2,400 really means $2,400 less up to $1,200 of any claims paid prior to July, then charging $300/month seems to make economic sense. $100 X 6 for the first 6 months = $600 and $300 x 6 = $1800 which totals $2,400 for the year.

[jmor99]

RCR--the date of service is the key (regardless of the date paid). Your employee has no recourse.

[GBurns]

jmor99

Are you saying that date of service trumps date incurred?

[J2D2]

GBurns,

How do you distinguish between those 2 dates?

[Mary C]

We are a very large nationwide company and regard the date of service as the date incurred. We ignor when it is paid.

GBurns - what is the difference between incurred and date of service? How do you define incur an injury? Isn't it the date you're injured?

[LRDG]

Incurred expenses (with respect to Sec. 125s), must be paid and services performed within the same plan year.

If either date of payment or dates of service are in a prior or subsequent plan year, the expense is not eligible for reimbursement in any plan year.

[GBurns]

J2D2 and Mary C

Sorry, bad post. There is really no difference.

Mary C

The date of injury is not relevant, only the date of service which would be the date the expense is incurred. After all you do not reimburse injuries under an FSA you reimburse expenses incurred.

LRDG

Where does it say that the expenses must be paid and must be paid within the same plan year? See Prop. Treas Regs 1.125-2 Q(6).

[LRDG]

GBurns, my position on dates of service/payment within the same plan year is an issue that was settled many years ago. Until recently I maintained an extensive benefits library that included all Sec. 125 related material. I incorporated regs in proposals, plan design, implementation, administration and filing 5500s.

I'm unable to substantiate the position with specific reference material at this time. I don't find IRS and DOL on line sites very reliable resources, relevant info burried in obscure technical corrections, common use of cross reference, and cumbersome amendments ('delete the word and, insert the word exclude') I'll post results of my online research. The answer I'm looking for may be in IRS notice 'Substantiation of claims' issued in early 90s', but search engines haven't turned up anything related to this particular notice.

Keep in mind Prop. Treas Regs 1.125-2 Q(6), was issued nearly 20(?) yrs ago. IRS emphasis at the time it was issued has limited application today.

"Incurred' is a term used by IRS through out the tax code and it's interpertation is typicall tied to the specific piece of tax legislation. In my opinion, it's continued use and interpertation with respect to Sec. 125 remains ambegious(sp).

yesterday commemorated the one year 'anti-versary' of losing my benefits library, among other losses.

[WDIK]

yesterday commemorated the one year 'anti-versary' of losing my benefits library, among other losses.

Perhaps Professor Solomon can help.

[Sandra Pearce]

I am curious what change in status prompted the employee to stop participating in the spending account. A reduction in work hours would have been a COBRA event. A medical leave of absence may have been covered under FMLA and allowed the person to continue in the plan, making normal contributions or catch-up contributions upon return.

[GBurns]

LRDG

It is curious that such a condition was not an issue in cases such as Grande v Allison. Nor do I remember it being raised in the many discussions that have taken place in the last 5 years involving FSAs (claims substantiation, use it or lose it, and debit cards in particular), HRAs, MERPs and even the "double dipping" issues.

[LRDG]

This is the only reference I found available on the internet. The 'services performed and paid in the same plan year' was a topic extensively reviewed at Employers Council for Flexible Compensation meetings prior to adoption of Final-Reg, 2002FED ¶12,541, §1.213-1, discussed with IRS Bureau Chief who authored Sec. 125.

FINAL-REG, 2002FED ¶12,541, §1.213-1, Medical, dental, etc., expenses.—

§1.213-1 Medical, dental, etc., expenses.—

Caution: Reg. §1.213-1 does not reflect recent law changes. For details, see ¶12,541.01.

(a) Allowance of deduction.—(1) Section 213 permits a deduction of payments for certain medical expenses

(including expenses for medicine and drugs). Except as provided in paragraph (d) of this section (relating to

special rule for decedents) a deduction is allowable only to individuals and only with respect to medical expenses

actually paid during the taxable year, regardless of when the incident or event which occasioned the expenses

occurred and regardless of the method of accounting employed by the taxpayer in making his income tax return.

Thus, if the medical expenses are incurred but not paid during the taxable year, no deduction for such expenses

shall be allowed for such year.

WDIK, thanks for the link.