Health Flexible Spending Accounts Cannot Be Used for Insurance Premiums
In IRS Letter 2016-0001, the IRS reiterates the rule that health care Flexible Spending Accounts (FSA) cannot be used to reimburse or pay health insurance premiums.
Reimbursement of Spouse’s Pre-Tax Premiums Results in Taxable Income to Employee
In IRS Letter 2016-0009, the IRS responds to a question about whether an employee can be reimbursed by their employer for health premiums paid pre-tax by the employee’s spouse. The letter goes on to state the following:
- Amounts paid to an employee to reimburse a spouse’s health premiums are not excludable from the employee’s income if the spouse paid the premiums pre-tax under their own cafeteria plan.
- Employers should be aware of any health care reform implication of such reimbursement, even if it is done on an after-tax basis. Consult with your legal professional before considering any reimbursement of policy premiums.
Documentation Required Before Reimbursing Under a Flexible Spending Account
In IRS Letter 2016-0013, the IRS addresses a question about whether the health care Flexible Spending Account (FSA) administrator could ask for verification documentation from his doctor before reimbursing his claim for “supplements related to a medical condition.” The letter goes on to state the following:
- Health FSAs can only reimburse medical expenses that the employee substantiates with documentation.
- Any reimbursement of ineligible expenses puts the health FSA’s nontaxable status at risk.
- If the doctor does not substantiate the claim, it is the employee’s responsibility to submit any additional documentation needed for reimbursement.
Next Steps
- Employers with cafeteria plans should ensure they are complying with the rules. These letters do not present any new information, but they do confirm that the IRS will take away the favorable tax status of the plan for cafeteria plan violations.
- For complete details, see the letters highlighted in the article.