FSA question

[wsp]

Is it plausible that previously approved 2007 claims but paid during January of 2008 can then be denied upon internal audit during August, 2008 and thus become 2008 taxable income to the employee?

[GBurns]

The choices seem limited.

If paid in January 2008 durring run out periood for 2007 expenses and applied against 2007 FSA balance, then it could be 2007 taxable income which would mean adjusted W-2, W-3, 941 etc etc. However, it would be easier to treat it as 2008 taxable income which is what I expect that most would do.

The logic for treating as 2008 taxable income is that the amount was paid (constructively received) in 2008 and since it was an ineligible expense it should not be applied to 2007 FSA balance.

But that is just me. Let's hope that you do hear from some TPAs who have experienced the actual situation.

[Ron Snyder]

Why was the claim subsequently denied although previously approved?

It seems to me that if it was paid in error (as with a reimbursement in excess of the deferral election for 2007) it could be different than a case where, for example, a medical credit or debit card was used and initially approved (pharmacy charges), but which upon review turned out not to be for 213(d) medical expenses (ie, case of beer was not prescribed).

I'm not sure that "taxable income" is the appropriate treatment. In fact, in either case I would argue that the plan should recover the excess payments rather then simply calling the amounts taxable income.

What does the plan doc say?

[J Simmons]

Hey, vebaguru,

I agree that the plan should recover the excess payments rather then simply calling the amounts taxable income.

But if the excess payments are not returned by the end of 2008, would you report it as taxable income?

How and why would an excess payment that is not recoverable be treated differently if it is an excess payment due to failure of substantiation rather than having exceeded the FSA dollars otherwise available for reimbursement.

Thanks in advance for your anticipated responses.