August 2001

Orthodontic Services- IRS officials commented that orthodontic expenses may be reimbursed at the time of payment. This means FlexAmerica will no longer be requesting an orthodontic treatment plan from participants. Monthly payment plan options will be accepted as well as full pre-payments of expenses.

2000 Changes to Publication 502 11-27-00

TheInternal Revenue Service has released a revised version of Publication 502 -- the Medical and Dental Expense brochure.

Changes Include:

Fertility Enhancement. Blessed are procedures "to overcome your inability to have children." Specifically mentioned are in vitro fertilization (including temporary storage of eggs or sperm) and surgery, including an operation to reverse prior sterilization.

Vasectomy. Now specifically deductible. Prior versions implicitly included the procedure under "Sterilization."

Laser Eye Surgery. Amounts paid for radial keratotomy or other eye surgery to promote the correct function of the eye. (See year-end comments below)

Learning Disability. Beyond special schools for those with mental or physical impairment, including nervous system disorders, you can include tutoring fees paid on a doctor's recommendation for the child's tutoring by a specially trained and qualified teacher. (Note: this comes up frequently with ADHD diagnoses - note the qualifiers.)

Medical Conferences. Amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of the taxpayer, the taxpayer's spouse, or the taxpayer's dependent. The costs of the medical conference must be primarily for and necessary to the medical care of the taxpayer, spouse, or dependent. The majority of time at the conference must be spent attending sessions on medical information. There is a specific caution that the cost of meals and lodging while attending the conference is not deductible.

Weight-Loss Programs. For years the IRS has held that you cannot include the cost of a weight-loss program for your general health even if your doctor prescribes the program. The new language states that you can include "the cost of a weight-loss program undertaken at a physician's direction to treat an existing disease (such as heart disease). But you cannot include the cost of a weight-loss program if the purpose of the weight control is to maintain your general good health." This reconfirms recent information letters released by the IRS. FSA administrators would be well advised to get a physician's substantiation for an underlying disease, such as hypertension, before allowing the expense.


The new 502 publication now lists non-deductible expenses separately. The list explicitly comments on items previously listed under "Medicines:"

Controlled Substances. Controlled substances in violation of federal law such as marijuana and laetrile are listed separately.

Nutritional Supplements. Explicitly non-deductible are "the cost of nutritional supplements, vitamins, herbal supplements, 'natural medicines,' etc. unless you can only obtain them legally with a physician's prescription." This clarifies the situation where a doctor prescribes a supplement or remedy when it can also be obtained without a prescription. A recent information letter affirming this position has also been released.


Court Decisions: Recent court decisions have pointed out the necessity of plan administrators to be extremely careful to include the language in employee communications that, unlike tax deductions on personal tax returns, cafeteria plans may only reimburse expenses incurred in the plan year -- not those paid in a plan year. Resolution of a recent case turned on the plan brochure given to employees, which included an ambiguous statement on what constituted "incurred" and referred the claimant to Publication 502. The 2000 IRS publication states clearly, "You can include only the medical and dental expenses you paid this year, regardless of then the services were provided." Obviously, this is not true for Section 125 plans where the date of service rules. Administrators should double-check their communication materials. Grande v. Allison Engine Co.

Another recent tax court decision on costs and expenses on adapted vehicles for the handicapped is helpful for plan administrators. The court ruled that the capital costs of the adapted van were deductible in the year paid. (This was a personal return, not a FSA expense.) However, it also ruled that depreciation for the van was not an eligible expense. Once again, the court affirmed that the excess cost of vehicles designed or adapted for use solely to accommodate disabled persons can qualify as reimbursable medical expenses.

Laser Surgery Year End Problem: Participants planning on laser surgery may find in the final tests that they are not appropriate candidates for the elective surgery. Thus they may now have very large amounts pending in their spending accounts. ECFC understands that more than a few participants have appealed to the IRS -- one with $5,000 at stake. The IRS has heard their cries but will not back down from its uniform coverage rule and "use-it-or-lose-it." To ameliorate problems this year and for next year's elections, administrators might consider sending an advisory to participants with large balances.

Dependent Care: A recent information letter reconfirmed the IRS position that Kindergarten is NOT a deductible child care expense. The revised 1999 version of Publication 503 (Child and Dependent Care Expenses) can be found at http://www.fedworld.gov/pub/irs-pdf/p503.pdf. The 503 publication excludes the Kindergarten expense by example, while the information letter is more explicit. The letter stated that the services provided must be "primarily for care." For a complete copy of the IRS letter, go to http://www.irs.ustreas.gov/prod/news/efoia/00-0246.pdf.