FSA's Diversion from IRS Definition Misleading to Participants

April 4, 2008 (PLANSPONSOR.com) - A Flexible Spending Account (FSA) plan sponsor had a fiduciary duty to plan participants to clearly state in plan documents that its definition of the word "incur" was different from the Internal Revenue Service definition, the U.S. District Court for the District of New Jersey ruled.

Caroline O’Meara’s understanding of when she “incurred” medical expenses was a reasonable interpretation of the language contained in the plan documents based on her prior experience with other companies and by the fact that the IRS recognizes that a medical expense is “incurred” for income tax purposes in the calendar year in which it is paid, the court said in its opinion. The IRS states on its Web site that: “You can include the medical and dental expenses you paid this year, regardless of when the services were provided,” according to the opinion.

Though O’Meara paid in full for a series of orthodontic treatments in 2005, the FSA administrator denied her request for reimbursement since some of the treatments were performed in the subsequent year. A New Hire Enrollment Guide and the Summary Plan Description for the FSA that were provided to O’Meara stated that only expenses incurred during a calendar year could be reimbursed by contributions made to the FSA during that calendar year, with no definition provided for “incurred.”

The opinion in O’Meara v. CIT Group Inc. is  here .