The IRS has just released the 2024 limits for Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs). HSA contribution and plan limits will increase to $4,150 for individual coverage and $8,300 for family coverage. Changes to these limits will take effect January 2024.
HSAs are tax-exempt accounts that help people save money for eligible medical expenses. To qualify for an HSA, the policyholder must be enrolled in an HSA-qualified high-deductible health plan, must not be covered by other non-HDHP health insurance or Medicare, and cannot be claimed as a dependent on a tax return.
QUESTION: One of our employees just noticed that her 2023 pay reflects a salary reduction for DCAP benefits. Initially, she said she never elected DCAP benefits. But when we showed her the DCAP election on her election form, she responded that she had made a mistake in completing the form and asked if we could fix it. Can we do this under the IRS rules?
ANSWER: Possibly, if you conclude that (1) there is “clear and convincing evidence” that your employee made a mistake; (2) the mistake is of a type that can be corrected; and (3) the correction is appropriate. (You may need more information before you can reach these conclusions.) While IRS cafeteria plan regulations do not address election changes for mistakes, IRS officials have informally commented that an employee’s election may be undone when there is clear and convincing evidence of a mistake. Some plans use an “impossibility” approach for evaluating whether such evidence exists, while others use a “facts and circumstances” approach. When the impossibility approach is used, an election change is allowed only if the evidence indicates that it was impossible for the employee to benefit from the mistaken election. For example, you could undo your employee’s DCAP election if she has no qualifying individuals. This approach is more cautious and is easier to administer because it does not involve examining an employee’s intentions or motives.
With the facts-and-circumstances approach, mistakes may be corrected if the plan administrator can reasonably ascertain that a mistake actually occurred. (This may involve inquiry into an employee’s intentions.) When this approach is used, we suggest adopting and consistently following written guidelines that require consideration of factors such as the employee’s past elections and benefit usage (e.g., whether your employee has elected DCAP benefits in the past or has consistently used her spouse’s DCAP); plausible evidence of a clerical mistake (e.g., an employee might easily write $5,000 instead of $500, but it is less likely that $5,000 was written instead of $2,400); assessment of the employee’s truthfulness; proximity to the first payroll date after the new election is in force; and any change in the employee’s circumstances that might indicate reconsideration rather than mistake. In addition, we suggest obtaining a signed certification from the employee describing the mistake and the intended election (e.g., if she intended to elect health FSA benefits instead, the appropriate correction would be an election of such benefits). A plan might also establish a time limit for requests to correct mistaken elections.
Under either approach, if the clear and convincing standard is met, an employee’s clerical, arithmetic, and data-entry errors may be corrected retroactively. (Note that the correction may also involve correcting mistaken payroll withholding.) But mistakes as to a benefit’s scope or tax treatment generally cannot be corrected. For example, your employee could not change her election because she mistakenly believed that the DCAP provided greater tax savings than the dependent care tax credit.
To reduce the likelihood of election mistakes surfacing after the plan year has begun, many employers provide employees with written confirmation of their elections after open enrollment and before the beginning of the new plan year. Employees are instructed to review their elections and notify the employer before the plan year begins if any corrections are needed.
The IRS has issued FAQs that explain when certain costs related to nutrition, wellness, and general health are medical expenses under Code § 213 that may be paid or reimbursed under a health FSA, HSA, or HRA. As background, Code § 213 defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. The FAQs explain that medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness, and do not include expenses that are merely beneficial to general health.
The FAQs confirm that the costs of dental, eye, and physical exams are medical expenses that can be paid or reimbursed by a health FSA, HSA, or HRA because these exams diagnose whether a disease or illness is present. The costs of smoking cessation programs and programs that treat drug-related substance use or alcohol use disorders are also medical expenses because they treat a disease. For the cost of therapy to be a medical expense, the therapy must treat a disease—thus, amounts paid for therapy to treat a diagnosed mental illness are medical expenses, while amounts paid for marital counseling are not. Likewise, the costs of nutritional counseling and weight-loss programs are medical expenses only if the counseling or program treats a specific disease diagnosed by a physician (e.g., obesity or diabetes); otherwise, these costs are not medical expenses. The cost of a gym membership is a medical expense only if the membership was purchased for the sole purpose of affecting a structure or function of the body (e.g., a prescribed plan for physical therapy to treat an injury) or treating a specific disease diagnosed by a physician (e.g., obesity or heart disease). However, the cost of exercise for the improvement of general health is not a medical expense, even if recommended by a doctor.
The FAQs also explain the circumstances under which the cost of food or beverages purchased for weight loss or other health reasons will qualify as medical expenses, and that the cost of non-prescription drugs can be paid or reimbursed by a health FSA, HSA, or HRA even though these items (except for insulin) are not deductible under Code § 213. The FAQs confirm that the cost of nutritional supplements is not a medical expense unless the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.
QUESTION: For 2023, an employee elected $2,400 of health FSA coverage under our calendar-year cafeteria plan, which is funded solely through employee salary reductions and does not provide for carryovers or include a grace period. The employee has already incurred medical expenses equal to this amount in 2023 and wants to be reimbursed for the expenses now, even though she has only made health FSA salary reductions of $400 to date. Do we have to reimburse all of these expenses right away, or can we limit reimbursements to the amount our employee has already contributed and ask her to resubmit the remaining expenses as additional contributions are made?
ANSWER: Your employee must be reimbursed for all of her expenses now, assuming that the expenses are otherwise eligible for reimbursement (e.g., they are for medical care incurred during the current period of coverage, and appropriate substantiation has been provided). That’s because IRS requirements for health FSAs include a “uniform coverage” rule under which the maximum amount of reimbursement must be available at all times during the plan year (or other period of coverage), reduced only for any prior reimbursements for the same period. Reimbursement is deemed “available” under the uniform coverage rule if claims are paid at least monthly, or when an employee’s submitted claims reach a reasonable plan minimum (e.g., $50). Thus, reimbursements cannot be restricted to the amount of the employee’s contributions.
The uniform coverage rule also prohibits accelerating an employee’s salary reductions based on health FSA claims submitted or paid. Note that the uniform coverage rule does not apply to DCAPs, so reimbursements under a DCAP can be limited to the amount that has been contributed, less expenses already reimbursed.
The IRS has released updated versions of Publications 502 and 503 for the 2022 tax year. Publication 502 describes the medical expenses that are deductible by taxpayers on their 2022 federal income tax returns. Publication 503 explains the requirements that taxpayers must meet to claim the dependent care tax credit (DCTC) for child and dependent care expenses.
The 2022 version of Publication 502 is substantially similar to its 2021 counterpart. Reflecting prior guidance, personal protective equipment (e.g., masks, hand sanitizer, and hand sanitizing wipes) for the primary purpose of preventing the spread of COVID-19 is now included in the list of medical expenses. Clarifications have been added regarding expenses to treat excessive use of alcohol and drugs, and relevant dollar amounts (e.g., the standard mileage rate for use of an automobile to obtain medical care) have been revised to reflect their 2022 inflation-adjusted values. Publication 502 has also been revised to reflect that the health coverage tax credit (HCTC) is not available after 2021. Publication 503 has been revised to note that most of the temporary changes to the DCTC and DCAP rules that were provided as COVID-related relief are no longer available, and to delete references to those changes. It also references prior guidance under which DCAPs could be amended to allow unused amounts from 2021 to carry over to 2022.