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FLEXIBLE SPENDING ACCOUNTS FSA’s TAX TREATMENT OF DISTRIBUTIONS Distributions for qualified medical expenses are generally not taxable. Prop. Treas. Reg. § 1.125-2, Q & A 7. Employer-sponsored FSAs may not reimburse non-qualified medical expenses or any other expenses. Prop. Treas. Reg. §1.125-2, Q & A 7. PORTABILITY/CARRYOVER OF FUNDS Amounts contributed to an FSA that are not reimbursed during the applicable coverage period are forfeited and may not be carried forward into a subsequent coverage period (“use it or lose it”). Prop. Treas. Reg. § 1.125-2, Q & A 5. DEATH/DIVORCE There are no special rules regarding death or divorce. Subject to the terms of the FSA, it might be possible to continue coverage to a spouse or dependents of a deceased employee, subject to use-it-or-lose-it rule. FSAs are subject to special COBRA rules. ADMINISTRATION An FSA is generally administered by the employer, subject to the terms of the FSA document. ADMINISTRATION SUBSTANTIATION Each medical expense submitted for reimbursement must be substantiated prior to reimbursement. Prop. Treas. Reg. § 1.125-2, Q & A 7. See also Rev. Rul. 2003-43, 2003-21 IRB 814, with regard to the application of the substantiation rules in connection with the use of debit or credit cards. ADMINISTRATION INFORMATION REPORTING There are no information reporting requirements applicable to amounts elected to be contributed to FSAs. FSAs as employee welfare benefit plans under ERISA may be subject to annual reporting on Form 5500. | ||
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