New HC reform's impact on dependent status under medical FSA

[Guest Sterling]

If a healthcare FSA participant has a 24 year old son living and working in another state and the son is not a dependent for tax purposes, but would be considered an eligible dependent under the new changes with healthcare reform, could the FSA participant pay for the son’s new eyeglasses with FSA dollars?

I feel that the old ruling stated that eligible expenses had to be incurred for the participant or a tax dependent. However, once the new HC reform kicks in, I feel like this senario would be acceptable. Is that the case?

Thanks!

[oriecat]

I believe it is not directly because of HC reform, but indirectly due to the IRS changes that were made to coincide with the requirement of allowing dependents to stay on up to age 26. So that those overage dependents premiums wouldn't be taxable, the IRS issued Notice 2010-38 which excludes from taxable the medical expenses of dependents under age 27. So this would apply to the flex plan, as long as the flex plan is amended to include the overage dependents.

http://www.mwe.com/index.cfm/fuseaction/pu...2ceff321784.cfm

[LRDG]

Below is a link to IRS Notice 2010-38 of IRS's intention to retroactively amend Sec. 125 for under age 27 dependents.

http://www.irs.gov/pub/irs-drop/n-10-38.pdf

The IRS announcement is here:

http://www.irs.gov/newsroom/article/0,,id=222193,00.html

The notice states that ERs providing coverage for dependents who have not attained age 27 as of the end of the taxable year, including Medical FSAs, can do so as of 03/30/2010, the effective date of the amendment; allow EE/participants to revoke a prior MFSA election and make a new election to include the additional amounts for no older than 27yoa dependents expenses.

IRS and Treasury intend to amend the regulations under § 1.125-4, effective retroactively to March 30, 2010, to include change in status events affecting nondependent children under age 27, including becoming newly eligible for coverage or eligible for coverage beyond the date on which the child otherwise would have lost coverage.

The plan document can be amended retroactively, but no later than 12/31/2010.

There appears to be some discrepency as illustrated here quoted from the notice:

§ 2714 of the PHS Act applies to children under age 26 and is effective for the first plan year beginning on or after

September 23, 2010, while, as noted above, the amendments to the Code addressed in this Notice apply to children who have not attained age 27 as of the end of the taxable year and are effective March 30, 2010

Until age 26 in the Public Health Searvice Act in Sec. 2714, under age 26 else where, and under age 27 for purposes of ACA addressed in this notice.

Also:

The Affordable Care Act also makes parallel amendments, effective March 30, 2010, to § 401(h) for retiree health accounts in pension plans, to § 501©(9) for voluntary employees’ beneficiary associations (VEBAs), and to § 162(l) for

deductions by self-employed individuals for medical care insurance. (See § 1004(d) of HCERA.)

In determining eligible Dependent Care FSA expenses, the age of the dependent is no more than 12 yoa, with the plan relying upon the EE/Participant for making an election within the age limit for eligible expenses.

It seems the age limit for under age 27 dependents for the Medical FSA would be applied in a similar manner.

Also, here is info pertaining to amendment of the plan document, and retroactive effective dates:

However, a retroactive amendment to a cafeteria plan to cover children under age 27 must be made no later than December 31, 2010, and must be effective retroactively to the first date in 2010 when employees are permitted to make pre-tax salary reduction contributions to cover children under age 27 (but in no event before March 30, 2010).