Project Nine

This client was an individual who experienced a problem with his Third Party Administrator (TPA) involving his flexible spending account. This case involves the administration of an employee pre-tax deductible account under section 125 of the IRS code for employee money set aside for reimbursement of healthcare and dependent care expenses.

The TPA's of his company's reimbursement plan was applying the rules for reimbursement for a medically eligible deduction in order to deny his request for reimbursement. The rules for medically eligible deductions apply to reimbursable medical expenses under an employee's medical plan, not Section 125.

Section 125 is an Internal Revenue regulation that allows individuals to set aside pre-tax dollars from their own income for payment of healthcare and dependent care expenses not generally covered by traditional medical plans. Usually there are lists of examples of the types of medical expenses that are potentially reimbursable using an employee's flex dollars, which are not covered under traditional medical plans. Examples of this are the purchase of prosthetic devices or acupuncture. These lists are not inclusive of all expenses. The IRS rule is that in order to be eligible for reimbursement the expense must qualify as a tax deductible expense on the Schedule A of the 1040 income tax form.

This issue came down to a discussion of tax deductibility versus eligibility under a medical plan. If the standard used was whether the expenses were medically covered under the employee's HMO plan as the TPA wanted to apply it, the expenses were not eligible for reimbursement under the flex plan. If the standard applied was that the expenses did qualify as tax-deductible expenses for the employee's income taxes, then it was reimbursable under his flex plan.

Resolution:

The consultant for Northeast HR for Hire assisted this client in understanding and sorting through the nuances of this issue. We narrowed the issue down to a single discussion point: Was this expense deductible under his income tax and if so was that the appropriate standard to be applied? We assisted this client in presenting his case. His argument was that the TPA was applying the wrong standard and he should be allowed to use his money to pay for a deductible medical expense.