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Background:

  • My employer's Plan Year is the fiscal year, so for this issue it concerns Sep 1, 2016 through Aug 31, 2017.
  • We were expecting a baby in mid-Aug 2016, so knowing charges would be coming in Sep and onward, I maxed out my Flex election while choosing coverage.
  • Everything went as planned, I had more than enough invoices to use the full Flex account, then in Dec 2016 I was told to return funds since the Service Date was outside of the Plan Year.

This is not my field of expertise, but I took the time to look around and found that the IRS says Service Date is irrelevant:

Qualified medical expenses. Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Pub. 502.

Page 2: What Expenses Can You Include This Year? You can include only the medical and dental expenses you paid this year, regardless of when the services were provided.

I opened an appeal case with HR and waited for more than a month for them to respond. They responded by saying they're right and I'm wrong, but the IRS publications they used to demonstrate this only referenced descriptions of how deductions from Salary into FSA are done and how those must be done within the Plan Year. So it wasn't relevant, and I'm going in circles with them now.

If I'm not correct here, what am I missing?

If I am correct but HR refuses to budge, what recourse do I have?

Thank you.

Update

After a few more email exchanges, I got a call from the HR supervisor. He stuck to their policy, and I told him that I'm basically tired of arguing this and giving up. But I did challenge him to find the source of their interpretation of the rules, so I'm sure I won't be hearing back from him.

  • Almost everything in the medical care payment universe revolves around date of service. HR is probably parroting information its receiving back from the FSA vendor. – quid Feb 23 '17 at 5:34
  • FSA vendor told me they were following rules as dictated by HR. – mike.k Feb 23 '17 at 5:34
  • You may want to start thinking about if you'll have enough invoices with dates of service within the plan year to use up your FSA, and if not, change your election amount ASAP. – TTT Feb 23 '17 at 15:06
  • @TTT It can't be changed. If they make me pay back the $2k+ I'll end up asking Walgreens for old receipts I can submit which might amount to a few hundred of eligible expenses. – mike.k Feb 23 '17 at 15:48
  • Paying back the money isn't that big of a deal (assuming you have it). The real goal is to make sure you get it all back with new expenses before Aug 31, 2017. If you don't think you'll have enough expenses to submit by then and you can't reduce your election, perhaps this is the year to take care of some medical things you may have been putting off (dental work, dermatology exam, etc.) – TTT Feb 23 '17 at 16:59
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Without being too pedantic there are a couple of important things going on.

  1. Tax deductibility of your contributions to an FSA:

Each year the IRS specifies the maximum allowed contribution that employees can make to an employer FSA on a tax preferred basis. This contribution is on a calendar year and your employer is not required to offer the maximum. Fiscal years can be complicated because they can span two different calendar year maximums. Switching employers can also be complicated because the FSA contribution maximum is the maximum you, the individual, can hide from taxation in a given year.

  1. The eligibility of your expenses:

Pub 502 was really written to lay out the types of medical expenses that can be deducted as expenses on your taxes. If you have medical expenses in excess of 10% of your income you can deduct them against your income, if you're itemizing your deductions. Pub 502 is now referenced in all sorts of documents to point to the types of services that are eligible. But in regards to what Pub 502 says about when an expense is incurred; individuals always operate on a cash basis for taxation purposes, as such for purposes of directly deducting your expenses, it is one of the few times that it matters when you pay the bill.

  1. FSA funds are not your money

This point is a little weird. A lot of people refer to FSAs as "Flexible Spending Accounts," but it's not really an account. Really, it's a Flexible Spending Arrangement. When you pay a medical bill from your FSA it's not the same as paying with your personal debit card. It's more like when your employer reimburses you because you picked up a toner cartridge from staples. Because of the tax implications of your FSA contribution and your employer's contributions toward various benefits the rules are written to address under what circumstances your employer is allowed to reimburse you and maintain the plan's tax exempt status. FSA funds are interesting because you have access to (read: your employer is permitted to reimburse you) your full contribution on the first day of the plan year. But, the date of service needs to be inside the plan year, and really this is in an effort to keep owners of companies from starting reimbursement plans for only themselves then expensing some cosmetic surgery they had last year. There are also a lot of rules related to non-discrimination with regard to the benefits received from an FSA offering (if FSA enrollment is concentrated to the high earners of the company the company and its employees aren't allowed to reap the tax benefits of the plan and generally won't offer it if a nondiscrimination test is failed).

This is all a big contrast to an HSA, which is a Health Spending Account, and really is your individual account. It's in your name and your employer can contribute to it, but generally can't see in to it any more than your checking account. For whatever it's worth HSA rules also cite Pub 502 regarding eligible services/expenses.


With all that said here's an excerpt from Conexis, a big nationwide FSA administrator, about the timing of eligible expenses.

Timing is everything: FSAs have a start date and an end date, and the time in between is called the plan year. Expenses must be incurred during the FSA plan year. As noted in IRS guidelines, "expenses are incurred when the employee (or the employee's spouse or dependents) is provided with the medical care that gives rise to the medical expenses, and not when the employee is formally billed, charged for, or pays for the medical care." This means the date of service must be within the current plan year and not when you pay for the service.

This is a link to the IRS doc being cited.

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