Vision Payroll

This week’s question comes from Eileen, an office manager. I read that one of the tests for an expense to qualify for reimbursement by a dependent care flexible spending arrangement (FSA) is that the care must be for one or more qualifying persons. What is a qualifying person for a dependent care FSA reimbursement? Answer: A person is a qualifying person if the person meets one of three tests.

Qualifying Person Test

A qualifying person for 2011 is:

• Your qualifying child who is your dependent and who was under age 13 when the care was provided.
• Your spouse who was not physically or mentally able to care for himself or herself and lived with you for more than half the year, or
• A person who was not physically or mentally able to care for himself or herself, lived with you for more than half the year, and either:
  • Was your dependent, or
  • Would have been your dependent except that:
    • He or she received gross income of $3,700 or more,
    • He or she filed a joint return, or
    • You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2011 return.

Exceptions Apply To General Rules

The rules above are generally applicable, but there are exceptions for certain situations such as children of divorced parents, care in the year or birth or death, adopted children, and other situations.

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Contact Vision Payroll for further information on the qualifying person test for reimbursement by a dependent care FSA.

This week’s question comes from Brent, an HR Director. I read about employees being reimbursed through a dependent care flexible spending arrangement (FSA) for summer camp costs and need more information. What are the tests for reimbursement of expenses by a dependent care FSA? Answer: Plans may have different forms that must be completed to receive reimbursement, but the expenses themselves must be qualifying expenses to be eligible for reimbursement.

Test for Qualifying Expenses

To be eligible for reimbursement under a dependent care FSA, an employee must meet all of the following tests:

• Qualifying Person: The care must be for one or more qualifying persons.
• Earned Income: The employee (and spouse, if filing jointly) generally must have earned income during the year.
• Work-Related Expense: The employee must pay child and dependent care expenses so that the employee (and spouse, if filing jointly) can work or look for work.
• Care Provider: The employee must make payments to someone the employee (and spouse, if filing jointly) cannot claim as a dependent. If paid to a child of the employee, the child must also be age 19 or older by the end of the year. Payments cannot be made to:
  • The employee’s spouse, or
  • The parent of the employee’s qualifying person if the qualifying person is the employee’s child and under age 13.
• Filing Status: The employee’s filing status must be single, head of household, qualifying widow or widower with dependent child, or married filing jointly. Married employees must generally file a joint return.
• Provider Identification: The employee must identify the care provider on the employee’s income tax return.

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Contact Vision Payroll for further information on the tests for reimbursement of expenses by a dependent care FSA.

This week’s question comes from Casey, an HR director. We have a dependent care flexible spending arrangement (FSA) and one of our employees has asked to be reimbursed for camp costs paid for her son. Can camp costs be reimbursed under a dependent care FSA? Answer: Camp costs can be reimbursed under a dependent care FSA in some circumstances.

FSAs Use Pre-Tax Dollars to Pay Qualified Expenses

Employers may set up FSAs (sometimes called flexible spending accounts) that allow employees to elect to contribute a portion of their pay to their FSA account. The amount paid into the FSA can be used to pay qualifying expenses of the employee. Most plans are set up to pay medical or dependent care expenses. The main advantage is that money is contributed to the plan on a pre-tax basis and is not taxed upon withdrawal if used to pay qualifying expenses.

Summer Camp Costs May Qualify for Reimbursement

While the cost of attending overnight camp does not qualify as an allowable expense, the cost of day camp may qualify as an allowable expense. The day camp costs must meet all the other requirements of §129 of the Internal Revenue Code of 1986 to qualify.

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Contact Vision Payroll today for further information on setting up or maintaining a dependent care FSA.

In Announcement 2011-14, the Internal Revenue Service (IRS) “has concluded that breast pumps and supplies that assist lactation are medical care under § 213(d) of the Internal Revenue Code because, like obstetric care, they are for the purpose of affecting a structure or function of the body of the lactating woman.” Therefore, assuming all other requirements are met, these expenses qualify as deductible medical expenses.

Reimbursement Allowed Under Flexible Spending Arrangements

Since these amounts qualify as deductible medical expenses, reimbursements of “these expenses under flexible spending arrangements [FSAs], Archer medical savings accounts, health reimbursement arrangements, or health savings accounts are not income to the taxpayer.”

Publication 502 to Be Revised

The IRS will revise Publication 502, Medical and Dental Expenses, to include this information

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Contact Vision Payroll if you have any questions on Announcement 2011-14.

This week’s question comes from Eric, an HR manager. I know there are changes to flexible spending arrangements (FSAs) because of health care reform. How does health care reform affect reimbursements for over-the-counter medicines in FSAs? Answer: The Patient Protection and Affordable Care Act (PPACA) made changes to reimbursements for over-the-counter medicines in the following types of accounts:

• Flexible Spending Arrangements (FSAs),
• Health Reimbursement Arrangements (HRAs),
• Health Savings Accounts (HSAs), and
• Archer Medical Savings Accounts (Archer MSAs).

Over-the-Counter Medicines Generally Are No Longer Reimbursable

Generally, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eyeglasses, contact lenses, co-pays and deductibles.

Change Is Effective for 2011

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.

IRS Provides Guidance on New Rules

The Internal Revenue Service (IRS) recently released Notice 2010-59 to provide guidance to employers and employees on the impact of PPACA and how it revises the definition of medical expenses as it relates to over-the-counter drugs.

Rev. Rul. 2003-102 Obsoleted

In conjunction with this change, the IRS also released Rev. Rul. 2010-23, which obsoletes Rev. Rul. 2003-102. This ruling provided guidance on employer reimbursements of amounts paid by an employee to purchase nonprescription medicines or drugs.

Employees Need to Plan for Changes When Making 2011 Elections

Vision Payroll recommends employees start to plan now to account for the impact of these changes on how they will make their elections under these types of plans.

This week’s question comes from Mark, a partner in a partnership. I’ve just been made a partner in a partnership. As an employee, I was participating in the company’s Flexible Spending Arrangement (FSA) plan. I’ve been told I can no longer participate. Can a partner participate in an FSA? Answer: FSAs, sometimes called “Flexible Spending Accounts”, are generally setup for reimbursement of medical or dependent care expenses. Partners in a partnership (including LLCs and other similar entities that have elected to be treated as a partnership for tax purposes) are considered self-employed individuals. As such, they are not eligible to participate in an FSA sponsored by the partnership in which they are a partner. Contact Vision Payroll if you have further questions on FSA eligibility.

The IRS recently issued Notice 2008-82 which provides guidance on the recently enacted §114 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act). The HEART Act amended §125 of the Internal Revenue Code of 1986 (IRC) to allow distributions of unused amounts in a Health Flexible Spending Arrangement (Health FSA, also called a 125 or cafeteria plan) to reservists ordered or called to active duty. In addition to providing guidance on “qualified reservist distributions” or QRDs, the Notice provides a transition rule allowing plans to be retroactively amended for QRDs made before January 1, 2010. Contact Vision Payroll if you have any questions on Notice 2008-82.