EBIA Weekly Newsletter

IRS Information Letters Confirm Cafeteria Plan Reimbursement Fundamentals

   May 5, 2016

IRS Information Letters 2016-0001 (Jan. 29, 2016), 2016-0009 (Feb. 19, 2016), and 2016-0013 (Feb. 23, 2016)

Letter 2016-0001

Letter 2016-0009

Letter 2016-0013

The IRS has issued three information letters confirming and calling attention to fundamental principles of cafeteria plan design and administration. Here are highlights:

  • Health FSAs Cannot Reimburse Insurance Premiums. Information Letter 2016-0001 confirms that health FSAs cannot be used to reimburse or pay health insurance premiums. The letter notes that this is a long-standing rule, citing the 2007 proposed cafeteria plan regulations and Publication 969.
  • No Income Exclusion for Reimbursement of Spouse’s Pre-Tax Premiums. Letter 2016-0009 responds to an inquiry about whether an employee can be reimbursed for health premiums paid pre-tax by the employee’s spouse. Citing Chief Counsel Advice 201547006 (see our Checkpoint article), the letter explains that amounts paid to an employee to reimburse a spouse’s health premiums may not be excluded from the employee’s income if the spouse paid the premiums on a pre-tax basis, such as through salary reduction under a cafeteria plan.
  • Documentation Required Before Reimbursing Expenses. Letter 2016-0013 addresses a health FSA participant who questioned whether the TPA could ask for certain information from his doctor before reimbursing his claim for “supplements related to a medical condition.” The letter explains that health FSAs can only reimburse medical expenses that the employee substantiates, and that reimbursement of ineligible expenses puts the health FSA’s nontaxable status at risk. Concluding that the TPA’s request for information was reasonable, the letter notes that if an administrator determines that documents from a physician’s office are inadequate, it is the employee’s responsibility to submit any additional documentation needed for reimbursement.

EBIA Comment: While there is nothing surprising about the three information letters, they may nevertheless be helpful to those on the “front lines” of cafeteria plan administration, who are sometimes asked to explain the reasons for plan operating rules and decisions. For more information, see EBIA’s Cafeteria Plans manual at Sections X.H (“No Reimbursement for Health Insurance Coverage Already Paid on a Pre-Tax Basis”), XX.D.6.c (“Dual-Purpose: Reimbursable If Appropriately Substantiated”), XX.D.8 (“Distinguishing Deductibility From Reimbursement of Medical Care Expenses (and Why It Matters)”), XX.H (“Health FSAs Cannot Reimburse Insurance Premiums”), and XX.J (“Adequate Claims Substantiation Must Be Received From the Participant and an Independent Third Party”).

Contributing Editors: EBIA Staff.