When is a Health Care FSA medical expense incurred?

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The Short Answer:

For purposes of the Health Care Flexible Spending Account (FSA), medical 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 billed, charged for, or pays for the medical care. The only exception to this rule is orthodontia expenses that are reimbursed based upon contract payments for ongoing service. This means we have to pay special attention to dates when expenses are paid in advance of receiving a product or service, such as online ordering.

Technical Answer:

 We rely on the IRS Code § 1.125-6 rules for substantiation regulations for all cafeteria plans as follows:

(a) Cafeteria plan payments and reimbursements-

(1) In general. A cafeteria plan may pay or reimburse only those substantiated expenses for qualified benefits incurred on or after the later of the effective date of the cafeteria plan and the date the employee is enrolled in the plan. This requirement applies to all qualified benefits offered through the cafeteria plan. See paragraph (b) of this section for substantiation rules.

(2) Expenses incurred-

(i) Employees' medical expenses must be incurred during the period of coverage. In order for reimbursements to be excludable from gross income under section 105(b), the medical expenses reimbursed by an accident and health plan elected through a cafeteria plan must be incurred during the period when the participant is covered by the accident and health plan. A participant’s period of coverage includes COBRA coverage. Medical expenses incurred before the later of the effective date of the plan and the date the employee is enrolled in the plan are not incurred during the period for which the employee is covered by the plan. However, the actual reimbursement of covered medical care expenses may be made after the applicable period of coverage.

 (ii) When medical expenses are incurred. For purposes of this rule, medical 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.

 Typical Examples

  • Sam purchases corrective reading glasses in-person at Walgreens on June 26th. His service was incurred on June 26th, and we rely on his receipt as documentation of the date of purchase

  • Sam purchases prescription glasses at Eye Mart Express and pays for them on June 26th. The documentation says “deposit made, glasses available in 7-10 days”. The glasses are ready on July 2nd and Sam picks them up on July 3rd. His service was incurred on either July 2nd or July 3rd - we will accept documentation of either date - the date the glasses were made available or the date they were picked up.

  • Sam orders prescription eye drops on the phone, in person, or online on June 26th. The online pharmacy fills the prescription on June 28th, and Sam picks it up on July 2nd. His service was incurred on either June 28th or July 2nd - we will accept documentation of either the fill date or the date the drops were picked up.

  • Sam orders glasses online on June 26th, and the online receipt shows they will ship in 4-5 business days from the date of order. His service was incurred on June 30th or later. We will accept that date as documentation, or other documentation from Sam of the date the item actually shipped or was received.

  • Sam orders glasses online on June 26th, and the online receipt shows the order was processed on June 27th. No information about the ship date is shown. His service could not have been incurred prior to June 27th, but because no shipping information was provided, we can accept the date the order was processed as sufficient documentation for the online order.

Note: For most claims for purchases online, we rely on the documentation of when an item will ship, if that’s provided. This is similar to using a pharmacy “filled” date, because it is the date the service provider provides the product or service. If a ship date isn’t provided, we may have to rely on either debit card swipe date (if paid for with a Benefits Card) or a transaction receipt, but that’s a last resort.

Bottom Line

The medical care expense is incurred when service is provided, not when it is paid for. Participants that have services performed close to the end of the plan year or coverage period if they are terminating mid-plan year, will need to be aware of when a medical expense is incurred to avoid any unnecessary forfeitures of remaining FSA balances.

Categories: Benefits in General, Compliance | Tags: Health FSA , Medical Expense , IRS Code Section 1.125-6 , Substantiation , Incurred Date , FSA , Flexible Spending Account | Return