The IRS points out that regulations provide that under the accrual method of accounting, a liability is incurred, and is generally taken into account for federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, so the liability for medical expenses is incurred in the taxable year in which medical services are provided to employees by the medical service provider. The question presented to the IRS arises because, if payments are made more than 2 Â½ months after the end of the taxable year in which the services are provided, the benefits may constitute deferred compensation for employees.
The timing of the deduction for payments the employer makes more than 2 Â½ months following the close of its taxable year depends on whether the payments are made through a welfare benefit fund as defined in section 419(e) of the Internal Revenue Code and when the medical and dental reimbursement amounts paid under the plans would be included in the income of employees participating in such Plans if such amounts were not excludible from income.
In plans that do not involve a welfare benefit fund within the meaning of section 419(e) of the Code, the IRS looks to plan terms. In the case presented to the agency, the plan terms provide that whether benefits are eligible for reimbursement is determined by whether the individual is a participant on the date that services are provided. Accordingly, the eligible employees are considered to receive the reimbursements in the calendar year during which they receive the medical and dental services under the self-insured plans.
In the particular case the IRS addresses, the employer is an accrual method taxpayer that maintains self-insured medical and dental plans for its eligible employees. The plan year of the plans is the calendar year.
Benefits under the plans are not provided through a welfare benefit fund within the meaning of section 419(e) of the Internal Revenue Code.
A third-party administrator reviews participant medical bills to determine whether the services are covered under the plans, and pays the service providers to the extent the services are covered with its funds for which the employer reimburses the administrator, or from a bank account funded by the employer. The third-party administrator generally pays claims within 30 days of receiving a bill from a service provider, but in certain circumstances, there is a delay by the service provider in billing the third-party administrator and the third-party administrator pays the service provider more than 2 Â½ months after the end of the taxable year in which the services are provided.
The Technical Advice Memorandum is here .