IRS: Substantiated Electronic Medical Reimbursements Still Deductible

May 6, 2003 ( - Employees whose companies use electronic debt cards or credit cards to reimburse them for substantiated medical expenses can still have the amounts excluded from their gross income.

>That was the indication by the Internal Revenue Service (IRS) in Revenue Ruling 2003-43, which described rules on the use of debit or credit cards to pay back participants in an employer-sponsored self-insured medical reimbursement program. 

>The ruling, which examined health flexible spending arrangements (health FSA) and health reimbursement arrangements (HRA), is at . While both type of programs are designed to reimburse employees and their families for uninsured medical care up to a preset limits, workers fund the FSA through payroll deduction as opposed to HRAs, which are entirely employer funded.

>The key, according to the IRS, was whether employer reimbursements were being made regardless of whether any medical expenses have been incurred rather than paying back a worker for money already spent for medical treatment. Reimbursements made regardless of expenses incurred are to be included in the employee’s gross income, the IRS said.  The IRS outlined two different fact scenarios to detail how the rule would be applied .

The other consideration in whether the health reimbursements are tax deductible is that extent to which the medical claim is substantiated. Tax officials said the program by an employer which sets up a system to properly confirm each claim and correct those in error is tax deductible to the employees while a company which merely sampled some of the claims to check for errors would not qualify.

The holding is effective for plan years beginning after December 31, 2003.

>The principal author of the revenue ruling is Barbara E. Pie of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. Pie at (202) 622-6080.