Temporary Mileage Rate Increase beginning September 2005
On Friday, September 9, 2005, the IRS announced a temporary increase in the mileage rate for obtaining medical goods or services. This increased amount is in effect for travel occurring from September 1 through December 31, 2005. This new four-month rate for computing mileage will be 22 cents a mile, up from 15 cents a mile for the first eight months of 2005. The IRS will release the 2006 year mileage rate prior to January 1. Please visit this site periodically for updated information.
Wednesday, September 03, 2003
Treasury and IRS Announce over-the-counter Drugs to be covered by Health Care Flexible Spending Accounts
FROM THE OFFICE OF PUBLIC AFFAIRS
September 3, 2003
JS-695
Treasury and IRS Announce over-the-counter Drugs to be covered by Health Care Flexible Spending Accounts
Today, the Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee.
“Flexible Spending Accounts are an important tool in helping people meet their health care costs,” stated Treasury Secretary John Snow. “Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow."
"Flexible Spending Accounts were established under the tax code to provide incentives for better health care," said IRS Commissioner Mark W. Everson. "This action is a sensible expansion and simplification of the program consistent with existing law."
Drugs are increasingly becoming available over-the-counter without prescription. Many health plans no longer cover the cost of these drugs as over-the-counter. While an over-the-counter drug is less expensive than the prescription drug, the cost to many consumers increases because the price paid by the consumer for the over-the-counter drug is greater than the co-payment by the consumer when the drug was covered by insurance. This is especially an issue for individuals who remedy chronic health problems by regularly taking an over-the-counter medicine.
Revenue Ruling 2003-102 explains that the statutory exclusion for reimbursements
of employee health expenses is broader than the itemized deduction for medical
expenses (which does not apply to nonprescription drugs). Thus, the guidance
clarifies that employer reimbursements of
employee health expenses that are nonprescription drugs, including reimbursements
through health FSAs and Health Reimbursement Arrangements (HRAs), are excluded
from income like other employer reimbursements of employee health expenses.
This will result in savings to consumers with access to employer plans who may
purchase nonprescription drugs. However, for purposes of the itemized medical
expenses deduction, the cost of such over-the-counter drugs continues to be
non-deductible. In addition, the cost of dietary supplements that are merely
beneficial to the employee's health are not excluded from income.
The text of Revenue Ruling 2003-102 follows:
Part 1
Section 105. - Amounts Received Under Accident and Health Plans
(Also Section 213. - Medical, Dental, etc., Expenses)
Rev. Rul. 2003-102
ISSUE
Are reimbursements by an employer of amounts paid by an employee for medicines, drugs, or dietary supplements purchased by the employee without a physician's prescription excludable from gross income under § 105(b) of the Internal Revenue Code?
FACTS
Employer N sponsors a health flexible spending arrangement (health FSA). The health FSA provides for the reimbursement of participating employees' medical care expenses that are not covered by other insurance. Employee A is a participating employee in Employer N's health FSA.
Employee A purchases an antacid, an allergy medicine, a pain reliever, and a cold medicine from a pharmacy, none of which are purchased with a physician's prescription. Employee A purchases these items for personal use, or for the use of Employee A's spouse or dependents, to alleviate or treat personal injuries or sickness. Employee A also purchases dietary supplements (e.g., vitamins) without a physician's prescription to maintain the general health of Employee A, or Employee A's spouse or dependents. Employee A submits substantiated claims for all of these expenses, which have been incurred during the current plan year, to Employer N's health FSA for reimbursement. Employee A is not compensated for these expenses by insurance or otherwise.
LAW AND ANALYSIS
Section 61(a)(1) provides that, except as otherwise provided in subtitle A, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items.
Section 105(a) provides that amounts received by an employee through accident or health insurance for personal injuries or sickness are included in gross income to the extent such amounts (1) are attributable to contributions by the employer that were not includible in the gross income of the employee or (2) are paid by the employer.
However, § 105(b) provides an exception to the general rule requiring inclusion in income. Section 105(b) provides that, except in the case of amounts attributable to (and not in excess of) deductions allowed under § 213 (relating to medical expenses) for any prior taxable year, gross income does not include amounts paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in § 213(d)) of the taxpayer or the taxpayer's spouse or dependents (as defined in § 152).
Section 105(e) states that amounts received under an accident or health plan for employees are treated as amounts received through accident or health insurance for purposes of § 105. Section 1.105-5(a) of the Income Tax Regulations provides that an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.
Section 213(d)(1) defines "medical care" to include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.
Section 1.213-1(e)(1)(ii) states that an expenditure that is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care. Section 1.213-1(e)(1)(ii) also states that expenditures for "medicines and drugs" are expenditures for medical care.
Section 1.213-1(e)(2) states that the term "medicine and drugs" includes only items that are legally procured and generally accepted as falling within the category of medicine and drugs. Section 1.213-1(e)(2) further provides that toiletries (e.g., toothpaste), cosmetics (e.g., face creams) and sundry items are not "medicines and drugs" and that amounts expended for these items are not expenditures for "medical care."
Rev. Rul. 2003-58, 2003-22 I.R.B. 959, considers whether amounts paid by an individual for medicines that may be purchased without a prescription of a physician are deductible under § 213. The ruling notes that § 213(b) permits an amount paid for a medicine or drug to be taken into account for the purposes of the § 213 deduction for medical care expenses only if the medicine or drug is a prescribed drug or insulin. Section 213(d)(3) defines a "prescribed drug" as a drug or biological that requires a prescription of a physician for its use by an individual. The ruling concludes that amounts paid for medicines or drugs that may be purchased without a prescription of a physician are not taken into account pursuant to § 213(b) and are therefore not deductible under § 213.
Section 105(b) specifically refers to "expenses incurred by the taxpayer for . . . medical care," as defined in § 213(d). There is no requirement in § 105(b) that the expense be allowed as a deduction for medical care under § 213(a) or that only medicines or drugs that require a physician's prescription be taken into account.
Accordingly, the amount expended by Employee A to purchase the antacid, allergy medicine, pain reliever, and cold medicine without a physician's prescription is an expenditure for medical care. Employer N's health FSA reimbursement of Employee A's cost for these items is therefore excludable under § 105(b), even though the cost would not have been deductible under § 213(a). However, the dietary supplements (e.g., the vitamins) are merely beneficial to Employee A or Employee A's spouse or dependents' general good health. Therefore, the cost of the dietary supplements is not an expense for medical care and is not reimbursable or excludable under § 105(b).
HOLDING
Reimbursements by an employer of amounts paid by an employee for medicines and drugs purchased by the employee without a physician's prescription are excludable from gross income under § 105(b). However, amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee or the employee's spouse or dependents, are not reimbursable or excludable from gross income under § 105(b).
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 2003-58 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue ruling is Barbara E. Pie of the Office of Division Counsel/Associated Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. Pie at (202) 622-6080 (not a toll-free call).
Saturday, April 06, 2002
Fifth Circuit Confirms That Sending COBRA Notices By Certified Mail Is Unnecessary
The 5th U.S. Circuit Court of Appeals recently handed down a decision in a case that proves that not only is a certified mailing not required to comply with COBRA notice provisions, it can even cause problems. In this case, it could be argued that the return receipt caused a lawsuit!
In Degruise v. Sprint, a terminated employee was offered COBRA by his former employer, and the notice was sent via certified mail, with a return receipt attached. The U.S. Postal Service (USPS) twice attempted to deliver the notice, but as the plaintiff was out of town on his honeymoon, he was not there to receive it, and the USPS left a note at his house that a letter was waiting for him at the Post Office.
Upon his return, he appeared at the Post Office twice to retrieve the letter, but personnel at the USPS could not find it. It was ultimately returned by the USPS to the employer, with an indication that it was undeliverable.
The plaintiff later began a new job with another employer, but before the coverage began under his new employer’s health plan, he received treatment for a medical condition. This treatment extended into the coverage period under his new employer’s plan, but the new plan denied his health claims as a pre-existing condition. The plaintiff filed suit against the defendant, alleging that he should have been offered COBRA, which would have covered earlier claims, and possibly reduced or negated any pre-existing condition limitation on the new plan (continuous prior creditable coverage).
The 5th Circuit agreed with the lower court that the defendant made a good-faith effort to comply with COBRA, saying:
"The law requires nothing more than for an employer to make a "good faith" attempt to provide notification. Sprint sent Degruise a notification letter by certified mail to the address Degruise listed. It had no knowledge why and was not responsible for the letter going undelivered. Therefore, Sprint did nothing to undermine the presumption of ‘good faith’ established under the case law once it attempted to notify Degruise of his COBRA benefits by certified mail."
The plaintiff had alleged that the defendant had failed in its notification duty under COBRA when it received the letter back from the USPS as "undeliverable." He suggested that when the company knew the notice had not been delivered, it should have taken further steps to ensure its receipt. This court did not agree.
It is interesting to note that the Circuit Court’s opinion closes with this footnote:
"It is worth noting that this whole episode could have been avoided had Sprint taken the added precaution of mailing Degruise his COBRA notification by ordinary first-class mail at the same time it sent the notification by certified mail. Sprint was not legally required to do this, but it would have been a good practice."
COBRA statutory language states simply that "The plan administrator shall notify . . . any qualified beneficiary with respect to such event of such beneficiary’s rights under this subsection." The courts have almost universally acknowledged that this requirement means that health plans are responsible for ensuring that a notice is sent to qualified beneficiaries. This means that a plan should document the sending of COBRA election notices, such as a log, a certificate of mailing, or other proof that the notice was mailed.
Many health plans, however, send these notices by certified mail with a return receipt request, so that it if necessary it can later be proven that the intended recipient actually received the COBRA notice. However, few, if any, courts have maintained that compliance with COBRA requires ensuring receipt.
Note: COBRA Procedure Manual subscribers can see our Recommended Procedure for sending COBRA Notices by clicking here.
Original article provided by COBRAhelp.com
Thursday, April 04, 2002
IRS Suspends Requirement to Form 5500, Schedule F
see a PDF file here.
Tuesday, April 02, 2002
Weight-Loss Programs May Be Tax Deductible
see a PDF file here.
