Vendor Refund of Cafeteria Plan Money

[Guest Patkelley007]

Any input on this situation is appreciated:

Patient participates in his Employer's Cafeteria Plan, and saves enough money for $3,000 elective eye procedure. Patient has eye procedure performed by Doctor, and pays using Cafeteria Plan debit card. Patient is not satisfied with eye procedure, and Doctor agrees to refund the $3,000.

First, when a cafeteria plan participant is due a refund, how is this usually handled? In this case, Doctor may be able to refund to the card that was used. What about a situation where a participant incurs charges and submits reimbursement requests... how would the refund be handled?

Second, patient is upset, even if the money is credited back to debit card, that he will not be able to use it before March 15. Patient wants the $3,000 check directly; does not want it funneled back into the plan. Seems like patient has evaded tax on that money. Should Doctor issue a 1099? Should Doctor notify patient's employer? Any other solutions?

Thanks for any help.

[J Simmons]

I would think the refund negates the notion that the employee has, to the extent of the refunded amount, incurred an expense that qualifies for flex account reimbursement. The payment should be restored to the employer, whether via a debit card or direct payment by the health care provider to the employer. The employee/patient is not entitled to the refunded amount.

If the payment from the doctor to the patient was for personal injury damages the patient suffered at the hand of the doctor, then that would belong to the employee. But the term 'refund' is used here, the measure of the amount of money is the same as the original expense paid for the medical services, and the payment is due to the patient not being satisfied--not necessarily damaged by the medical procedure to his or her eyes.

[LRDG]

There are no regulations that address situtations such as this one.

But for some non-IRS/DOL liability imposed upon the care provider via the debit card, care providers are not obligated to the plan.

The participant would continue the obligation to use refunded monies according to FSA regs and the plan requirements.

If not for the Flex debit card, the participant would have filed a claim and been paid via FSA reimbursement check or direct deposit(?). Next the participant would pay the care provider via cash, personal check, or personal credit card. Any refund to the plan by the care provider would violate the patient's/participant's rights in the transaction with the care provider.

Any refund would have been reversed (cash, check, credit card) directly to the patient/participant. While it would be preferable if the participant returned $3k to the plan, in reality it's not likely and more importantly, not enforcable, and because the care provider has no obligation to the plan, the plan is under no obligation to act as FSA collector of debts.

The participant continues to be obligated to spend refunds according to Sec. 125. If participant undergoes an IRS audit and the refunded money is found by IRS auditors to not have been spent accordingly, participant will be subject to penalties and taxes on $3k.

I don't think that because this transaction went badly for the participant that refunded money should be forfeited, but the regs don't give a clue how to correct this problem. i do think it's possible to correct without enriching the participant or the plan.

[jpod]

Interesting problem.

Did the employee sign a release of claims against the doctor as a condition of receiving the so-called "refund?" (I'd be very surprised if the doctor gave the money back so easily without asking for something in return.) If so, I would take the position that the expense was incurred, and the "refund" was a settlement of a separate claim by the employee against the doctor, so the $$ should NOT go back to the employer/plan. Can't imagine that the IRS would ever have any quarrel with that.

[LRDG]

No matter how you slice this $3k, once it is returned to the participant by the physician, it becomes earned income on which the participant did not pay income tax. The participant should (must) spend the $3k on some eligible medical expense/s. The participant has the option to have the procedure performed again by a different physician.

However, purely as a time constrainght, it may not be possible to have the services performed by 03/15/08, the last day of the plan year. I'm guessing it's a surgical procedure, Lasiks maybe.

Purely as a medical constrainght, it's possible the time allowed to spend the funds is not medically sufficient to perform the procedure a second time.

The participant's income tax return could go un-audited. It's also possible the $3k will go undetected.

So, let's see, the options are as follows:

1 forfeit $3k

2 IRS audit

3 risk blindness

[GBurns]

The end result is that it is no business of either the employer or the plan.

It could be credited back to the debit card, but I do not recall them having that feature. Even if it did, What happens if the participants objects or the card is needed but the participant refuses to give it?

The Dr could issue a 1099 but this is doubtful since most companies only issue a 1099 for services rendered by individuals. But if one is issued, then it would have to reported as potentially taxable income (not necessarily earned income).

If no 1099, as LRDG suggested, it should (must) be reported. But, What happens if it is not? Not much in my experience.

The person would have to be selected for audit which is a long shot anyhow. If selected, the audit might be for some specific other item and this issue is not involved. But the audit could be broad spectrum. In that case, this item would have to be noticed, which is possible. If it is noticed, it could be taxed and it could have penalties for under reporting. But the tax liability depends on the overall tax report and we do not know what exemptions, deductions, losses etc that are part of this person's tax return. So even if found to be taxable income, there might be no taxes dues anyhow.

So, I guess it comes down to a personal judgement call based on looking at the overall picture and bearing in mind the person's medical necessity.

[Guest Ric Joyner]

Any input on this situation is appreciated:

Patient participates in his Employer's Cafeteria Plan, and saves enough money for $3,000 elective eye procedure. Patient has eye procedure performed by Doctor, and pays using Cafeteria Plan debit card. Patient is not satisfied with eye procedure, and Doctor agrees to refund the $3,000.

First, when a cafeteria plan participant is due a refund, how is this usually handled? In this case, Doctor may be able to refund to the card that was used. What about a situation where a participant incurs charges and submits reimbursement requests... how would the refund be handled?

Second, patient is upset, even if the money is credited back to debit card, that he will not be able to use it before March 15. Patient wants the $3,000 check directly; does not want it funneled back into the plan. Seems like patient has evaded tax on that money. Should Doctor issue a 1099? Should Doctor notify patient's employer? Any other solutions?

Thanks for any help.

The money should go back on the card because the card should have language based on regulations from August of 03 on the debit cards. The employee cannot get that money back in a check form and will forfeit the money. If the employee doesn't cooperate with the dr the dr should inform him what is on the back of the card and then call the employer. The employer is ultimately responsible for how the plan is administered.

Ric rj@eflexgroup.com

[LRDG]

I'm not sure (I'm not familar with the card), what language based on regulations from August 03 you are referring to, but if the funds are credited back to the FSA debit/credit card, the funds will be forfeited if it's lasiks. There is a 2-3 month waiting period for healing between a first and second lasiks procedure.

The employee met all requirements and spent the $3k as required by plan & regs and the plan agreed because the plan paid the bill.

Should the employee be penalized with forfeiture for undergoing unsuccessful eye treatment? The litertature for lasiks surgery indicates complications are few, but there is a segment of population for whom surgery will never be successful and others who will benefit from a second procedure after 2-3 months for healing from the first.

If the plan does receive the refund I think there should be some accomodation made to address this situation. For instance, the refund could be set asside by the plan in order for the participant to use the funds after the end of the plan year, and if not a candidate for a second surgery, allow the funds to be used for other eligible expenses.

The participant might be in a better position if the funds remained with the doc until another doc is selected or the second procedure is performed with the same doc, 2-3 months after the end of the plan year for medically necessary healing. But does that meaningfully change anything really? what if the doc moves away, goes out of practice, insolvent? or refuses refund at a later time, the chances of any of these increases the more time elapses.

Will the plan or the IRS view any of those situations more favorabely than if the participant received the refund and spent it on medical expenses.

[GBurns]

Ric's suggestion regarding the Dr reporting to the employer raises another issue fror me, privacy laws.

While the Dr would not be releasinng PHI, it might be that he would be releasing and discussing protected financial information, in that he would be discussing the patient's account, debt and payment practice/payment history. This should run foul of FDCPA, FCRA and other financial privacy laws.