Section 7
Appendix of Forms
IRS FORMS CONTAINED IN THIS SECTION ARE SAMPLES
ONLY. PLEASE CONSULT WITH YOUR ATTORNEY BEFORE
UTILIZING THESE SAMPLES.
For current IRS forms, go to: www.irs.gov
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Flexible Benefits Training
Date
Contact Name
Company
Address 1
Address 2
City/State/Zip
RE: Individual Health Insurance Plans in a Cafeteria Plan
Dear [Contact Name]:
Due to recent changes in the law, a question has arisen as to the advisability of allowing an "other health insurance
premium" conversion option as part of an Internal Revenue Code (IRC) Section 125 plan (cafeteria plan). According to
Revenue Ruling 61-146, and an informal opinion by the Office of IRS Chief Counsel, this is a permissible practice.
However, several issues must be considered in determining the advisability of allowing such an option. When a salary
reduction contribution is made through an IRC §125 plan, the contribution, in effect, becomes an employer contribution.
Thus, for many purposes, the individual policy becomes an employer-sponsored plan subject to laws and regulations such
as:

COBRA

HIPAA, including the certification requirements

ERISA, including reporting and disclosure requirements

Medicare secondary payor rules

Nondiscrimination rules under Title VII of the Civil Rights Act
In addition, many state group health insurance laws define such arrangements as employer sponsored plans subject to the
group health insurance mandates. Many insurance carriers are unwilling to issue individual policies that are brought
under the group insurance laws in this manner.
For the aforestated reasons, we discourage the practice of allowing "other health insurance premiums" to be a permitted
salary reduction option through an IRC §125 plan. If you intend to continue or commence such a practice, we recommend
that you notify the carrier of the individual health insurance plan and consult with your legal counsel.
If you have any questions, please contact [Name and Phone Number].
2011
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Flexible Benefits Training
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Client Engagement Manager
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2011
Interview with client to fill out Client Checklist and design Plan Document and Summary
Plan Description.
Conduct initial discrimination tests.
Establish a contact at client’s office that participants will be working with for all questions about the Plan.
Provide client with worksheets to determine key employees [IRC 416(i)(1)(A)], highly compensated employees
[IRC 414(q)] and those making under $25,000 in annual compensation
Distribute general information about the Cafeteria Plan to all employees.
Pickup key employee, highly compensated employee and total compensation worksheets.
Meet with payroll personnel to discuss salary redirection and reimbursements as they apply to individual
paychecks.
Enrollment — Group or individual meetings to explain Cafeteria Plan and answer any questions. Advise those
with dependent care expenses of childcare credit.
Distribute Summary Plan Descriptions to participants within 120 days after plan is adopted.
Distribute Summary Plan Descriptions to new employees within 90 days after they become participants.
Collect election forms directly from participants or have employer assemble and forward to you.
Return short verification letter to each participant restating their annual and per paycheck election for each portion
of the Plan.
Determine total nontaxable benefits provided to all employees, key employees and highly compensated
employees based on annual elections.
Test for discrimination (25% Concentration Test for all benefits, 55% Average Benefits Test, and 25% Owners
Test for the dependent care portion of the Plan).
Test for discrimination at the beginning of the Plan based on annual election amounts and at least quarterly
thereafter based on year-to-date contributions.
Keep accurate records throughout the Plan Year for changes of family status, terminations, and new employees.
Keep your client and participants informed of account balances through company statements and individual
employee statements.
Reconcile to client’s year-to-date records quarterly.
Two months before the Plan year end — inform employees of account balances including year-to-date
contributions, claims, and disbursements plus a reminder of their annual election amount, the amount they need to
request by Plan year end, the number of grace days allowed after the Plan year end, and their risk of forfeiture.
Thirty days prior to Plan year end — send individual reelection forms showing last year’s elections and stating
any changes that will take place in the new Plan year.
Enrollment — Group or individual meetings to explain Cafeteria Plan and answer any questions. Advise those
with dependent care expenses of childcare credit.
By January 31 of every year — furnish participants in dependent care portion of Plan with W-2 showing total
benefits provided for their taxable year through the Cafeteria Plan.
Plan year end plus grace days expiration — test for discrimination based on total disbursements from the Plan and
send final reports to advise client and participants of any forfeitures or pre-funded amounts.
Complete Form 5500. All required forms and schedules are due by the last day of the 7th month after the plan
year-ends. If needed, File Form 5558 “Application for Extension of Time To File Certain Employee Plan
Returns” to obtain an extension of time for 2 ½ months. (Suspended for Fringe Benefit Plans.)
Final Discrimination Testing - test for discrimination at the end of the Plan based on total disbursement amounts.
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Flexible Benefits Training
Flexible Spending Account Plan Application
1.Legal Name of Company Sponsoring Plan ______________________________________
2. Business Entity Type:


C Corp.
Sole Proprietorship

Partnership

Not-For-Profit

Government Entity or church

S Corp.

Limited Liability Company
3. Principal Business Activity _______________________________________________
4. Federal Employer Identification Number (Must be 9 digits): __ __ -- __ __ __ __ __ __ __
5. Contact Person
_________________________________
Title __________________________________________
6. Street Address (No PO Boxes): ____________________________________________
City, State, Zip: _________________________________________________
7. Phone Number
Fax Number
E-mail Address
8. Effective Date – This FSA plan will be:
( ) A new plan effective as of (date) _______________________
( ) An amendment and restatement is effective as of (date) ____________________
(1) This amendment and restatement is effective as of (date) ______________________
(2) State the effective date of the original plan (date) ___________________
(3) State the plan number (consult your last Form 5500 and/or plan document for this number assigned to
your plan) ________
9. Plan Year – The first plan year for the FSA will be:
A 12-consecutive-month period beginning (date) ___________ and ending (date) __________________
A short plan year beginning (date) ____________________and ending (date) ____________________
10. Employer’s Principal Office – This FSA plan shall be governed under the laws of the:
State of ____________________________
Commonwealth of __________________________
11. All employees are eligible for the FSA Plan:
Except:

Employees not eligible under Employers group medical plan

Part-time Employees expected to work less than ___ hours per week

Commissioned Employees

Union Employees

Other (type & attach)
12. All employees can enter the FSA Plan:

Same as Employer’s group medical plan

_____ days after date of hire
13. Benefits – The benefits selected below shall be included in the FSA Plan:

2011
Medical expenses not covered by insurance and
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Flexible Benefits Training

annual maximum per participant shall be $_____________
(typical limits are between $1,500 and $2,600 annually)

Adult and child daycare expenses

Health and other insurance (select coverages below):
__Health Insurance Premiums __Disability insurance** __Critical Illness Insurance
__Dental Insurance __Vision Care Insurance __ Accidental Death/Dismemberment
__Group-term Life Insurance* __Cancer Insurance __Other Insurance (specify) _____
*Group-term life insurance up to $50,000 coverage
**If disability insurance is paid for on a pretax basis, any benefits received are taxable to the employee
Note: Insurance products with a return-of-premium feature cannot be paid for on a pretax basis.

Individual Health and Disability Insurance
14. Contributions – The contributions for the FSA Plan will be:

Employee (salary reduction) contributions only

Employer contributions only

Both salary redirection and Employer contributions
$ ________annually per Participant $_____Employer contributions convertible to cash
15. Legal names(s) of affiliated company(ies) that will be covered by this plan: (provide names, tax ID numbers and full
addresses on attachment)
16. Total number of employees ___________
17. Pay cycles – Payroll is provided (weekly, semi-monthly, monthly, etc.) _________________________
Deductions to begin ________________________________
Payroll is prepared: __In house __Out sourced (specify payroll company):
___________________________________________
Pricing Information
18. Fee for a New Plan setup or restatement. Call for quote
19. Fee for Participant Services. $__ per month/participant. Client is billed by Admin. Co. each month.
20. Fee for Annual Plan Compliance. $__ per month is billed by Administrative Company
Shipping Instructions
21. Shipping method (FSA setup kit is shipped within 2 business days):
Date Received
Date Application Signed
Client Number
Full Administration
Plan Doc/5500 Only
Accounting Use
Set-up Fee
Monthly Charge per participant
Annual Fee
Lead Source (Company Name)
Relationship Manager (Agent Name)
Commission Schedule
Anticipated First Billing Month
Additional Notes
If Individual Health and Disability Insurance marked – send advice letter.
2011
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Flexible Benefits Training
March 8, 2016
Dear
One of the services we provide for your Flexible Benefit Plan is discrimination testing.
In order to perform the discrimination testing; please complete the enclosed questionnaires identifying the Key
and Highly Compensated employees for your plan year 2001.
One of the discrimination tests is performed on all qualified benefits that are part of your Flexible Benefit Plan.
Although we track the amounts contributed to the flexible spending accounts (Health Care Reimbursement and
Dependent Care), we need the following information for the insurance premium portion of the plan.
Total dollar amount of salary redirections for the insurance benefits that are part of your Plan.
for the Key Employees: $ ___________
for all other employees $___________
- Please provide this information for these premiums for the Month of June
Provide the total number of employees eligible to participate in the Dependent Care Portion of your plan.
_____________________. This should be every employee that is eligible for your Section 125 Cafeteria Plan.
Once we have received this information, we will perform the tests and advise if your Flexible Benefit Plan has
failed the discrimination testing. No notice will be returned if your Plan is found to be nondiscriminatory. Please return the
information to our office as soon as possible.
If you have any questions, please feel free to contact me. My telephone number is.
Sincerely,
2011
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Flexible Benefits Training
IRC Section 125 — Cafeteria Plan
Highly Compensated Employees — IRC 414(q)
______________________________________________
(Company Name)
Plan Year Ended
________________
List all employees who fit into one or more of the following categories. An employee may be classified as
highly compensated on the basis of more than one category. When listing highly compensated employees, list
each employee only once.
1.
List all employees with more than 5% ownership during the prior or current plan year.
______________________________
______________________________
______________________________
______________________________
2.
List all employees who are a spouse or relative (within the meaning of IRC Section 318) of any
individual listed in number 1 above.
3.
______________________________
______________________________
______________________________
______________________________
List the employees earning more than $95,000 (2005) (indexed) in the prior plan year.*
______________________________
______________________________
______________________________
______________________________
*
An employer may elect to treat as highly compensated under the $95,000 compensation test only those
employees who are also in the top-paid 20% group.
2011
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Flexible Benefits Training
IRC Section 125 — Cafeteria Plan
Key Employees — IRC 416(i)(1)(A)
__________________________________
(Company Name)
Plan Year Ended
__________________
List all employees who, at any time during the current plan year, fit into one or more of the following four
categories. An employee may be classified as a key employee on the basis of more than one category. When
listing key employees, list each employee in each category.
1.
2.
3
Officers* with annual compensation greater than $140,000 (indexed)]:
_________________________________
_________________________________
_________________________________
_________________________________
Employees with more than 5% ownership:
________
__________________________________
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
Employees with more than 1% ownership and annual compensation greater than $150,000:
_________________________________
_________________________________
*The determination as to whether an employee is an officer should be made on all the facts and circumstances. Generally
the term “officer” means an administrative executive. According to regulations under 414(q), an officer includes the
president, vice-presidents, general manager, treasurer, secretary, and comptroller of a corporation and any other person
who performs duties corresponding to those normally performed by persons occupying those positions. So, for example,
all of the employees of a bank who have the title of vice-president or assistant vice-president are not necessarily officers
unless they have the authority of an officer. Similarly, an employee who has the authority but not the title would be
considered an officer. Sole proprietorships, partnerships, and associations, among other unincorporated entities, may have
officer for this purpose.
No more than 50 employees shall be treated as officers. If there are less than 50 employees who are treated as officers, no
more than the greater of 1) three employees or 2) 10% of all employees will be treated as officers.
2011
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Flexible Benefits Training
IRC SECTION 105 (h)
Medical Expense Reimbursement Plans
Percentage Test
A plan is not discriminatory as to eligibility if it satisfies one of the following percentage tests.
The medical expense reimbursement plan benefits:
A.
70% or more of all employees.
or
B.
80% or more of all the employees who are eligible to benefit under the plan
if 70% or more of all employees are eligible to benefit under the plan.
1.
Total employees
__________
2.
Total inelgible (see line 6, Excluded Employees Form)
__________
3.
Employees eligible under the plan
(subtract (1) from (2))
__________
4.
Employees excluded from benefiting
__________
5.
Employees eligible to benefit (subtract 4 from 3)
__________
6.
Number of employees participating in plan
__________
7.
Percent of eligible nonexcluded employees who participate
(divide (6) by (3)). If > 70% stop. Do not complete the
remainder of this form.
__________
Complete (8) only if (7) is less than 70% and complete (9) only if
(8) is 70% or more:
8.
9.
Percent of nonexcluded employees who are eligible to
participate (divide (5) by (3))
__________
Percent of eligible employees who are participating
(divide (6) by (5))
__________
Conclusion:
If line (7) is > 70%, the plan has satisfied requirement A above.
If line (8) is > 70% and line (9) is 80% or more, the plan has satisfied requirement B above.
2011
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Flexible Benefits Training
IRC Section 105(h)
Medical Expense Reimbursement Plans
Benefits Available Test
Answer the following questions.
YES NO
1.
Are any benefits under the
plan available only to highly
compensated individuals?
If yes, this plan is discriminatory. Highly
compensated individuals must include excess
benefits in gross income.
2.
Are all benefits available for the
dependents of highly compensated
individuals also available on the same basis
for dependents of all other employees who
are participants?
If no, the plan is discriminatory. Highly
compensated individuals must include excess
benefits in gross income.
3.
Is the plan’s maximum limit for the
amount of reimbursement which may
be paid to a participant for any single
benefit, or combination of benefits based
on:
A.
Percent of compensation?
B.
Participant’s age?
C.
Years of service?
If yes to A, B, or C this plan is discriminatory.
Highly compensated individuals must include
excess benefits in gross income.
7
4.
5.
2011
Is the plan’s maximum limit for the
amount of reimbursement, uniform to all
participants and for all dependents of
employees who are participants?*
If no, this plan is discriminatory. Highly
compensated individuals must include excess
benefits in gross income.
Are waiting period uniform to all
participants?
If no, this plan may be discriminatory. Highly
compensated individuals must include excess
benefits in gross income.
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Flexible Benefits Training
Nondiscriminatory Classification Test
Reg. Section 410(b)
____________________________________
(Company Name)
Plan Year Ended ____________________
Total
Highly
Nonhighly
Employees Compensated Compensated
1. Total employees
___________ ___________
__________
2. Employees ineligible under the plan
___________ ___________
__________
3. Total eligible employees (Subtract line 2 from line 1) _______ (A) ________
4. Total employees excluded from benefiting
________ (B)
___________ ___________ _________
5. Total employees eligible to benefit
(Subtract line 4 from line 3)
___________ ___________
6. Concentration of nonhighly compensated employees
________ (C)
_________ %
(Divide Nonhighly compensated (B) by Total Employees (A))
7. Safe Harbor percentage
_________ %
8. Unsafe Harbor percentage
_________ %
9. Percentage of nonexcluded, nonhighly compensated employees
eligible to benefit under the plan. (Divide Nonhighly Compensated
(C) by Nonhighly Compensated (B))
_________ %
Conclusion:
If line 9 is less than line 7, then it fails the Nondiscriminatory Classification Test.
2011
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Flexible Benefits Training
Nondiscriminatory Classification Test
Reg. Section 410(b)
2011
NHCE
Concentration
Percentage
Safe Harbor
Percentage
Unsafe
Harbor
Percentage
0-60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
71%
72%
73%
74%
75%
76%
77%
78%
79%
80%
81%
82%
83%
84%
85%
86%
87%
88%
89%
90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
50.00%
49.25%
48.50%
47.75%
47.00%
46.25%
45.50%
44.75%
44.00%
43.25%
42.50%
41.75%
41.00%
40.25%
39.50%
38.75%
38.00%
37.25%
36.50%
35.75%
35.00%
34.25%
33.50%
32.75%
32.00%
31.25%
30.50%
29.75%
29.00%
28.25%
27.50%
26.75%
26.00%
25.25%
24.50%
23.75%
23.00%
22.25%
21.50%
20.75%
40.00%
39.25%
38.50%
37.75%
37.00%
36.25%
35.50%
34.75%
34.00%
33.25%
32.50%
31.75%
31.00%
30.25%
29.50%
28.75%
28.00%
27.25%
26.50%
25.75%
25.00%
24.25%
23.50%
22.75%
22.00%
21.25%
20.50%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
7-35
Flexible Benefits Training
Indexed Figures
The indexed compensation levels for determining who is a highly compensated employee or a key employee are as
follows.
TYPE OF EMPLOYEE
BASE YEAR
1987
2009
2010
2011
Highly Compensated
Employee
$75,000
$110 ,000
$110,000
$110,000
Top Paid Group of
20%
$50,000
$110,000
$110,000
$110,000
Key Employee,
Officer
$45,000
$160,000
$160,000
$160,000
2011
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Flexible Benefits Training
IRC Section 129 — Dependent Care Assistance Plan
55% Average Benefits Test IRC 129(d)(8)
(Applies to plan years beginning after December 31, 1989)
__________________________________
(Company Name)
Plan Year Ended
_______________
STEP 1
Nontaxable benefits paid to highly compensated employees
________________ (A)
Number of highly compensated employees
________________ (B)
_____
Average benefits paid to highly compensated employees (A/B)
(C)
STEP 2
Nontaxable benefits paid to nonhighly compensated employees
________________ (D)
Number of nonhighly compensated employees
_________________ (E)
Average benefits paid to nonhighly compensated employees (D/E)
______
(F)
STEP 3
______
Average benefits paid to highly compensated employees (A/B)
(C)
Ratio
X 55% ______
Average benefit threshold for nonhighly compensated employee
Conclusion:
______
(G)
If (F) is less than (G), then all amounts paid to the highly compensated employees under IRC Section 129 are taxable.
NOTE: When applying this test, in the case of any benefits provided through a salary redirection agreement, the employer may disregard all
employees whose compensation falls below any specified amount that is less than $25,000, all employees who have not attained age 21 and
completed 1 year of service, and employees covered by a collective bargaining agreement.
CAUTION: Some people have interpreted this test to include all eligible employees in the denominator. Others believe that only employees electing
dependent care assistance are to be included in the denominator. The IRS has not issued any regulations regarding the exact method of computing the
Average Benefits Test but seems to favor using all eligible employees.
2011
7-37
Flexible Benefits Training
IRC Section 129 — Dependent Care Assistance Plan
25% Concentration Test for
Principal Shareholders or Owners — IRC 129(d)(4)
_________________________________________________
(Company Name)
Plan Year Ended_____________________________
Nontaxable benefits paid to principal shareholders or owners
_____ (A)
Nontaxable benefits paid to all participants
Total benefits paid
(B)
Percentage of benefits paid to principal shareholders or owners (A/ B)% ______(C)
Conclusion:
If (C) is greater than 25%, all amounts paid to highly compensated participants under IRC Section 129
are taxable.
2011
7-38
Flexible Benefits Training
IRC Section 137 — Adoption Assistance Plan
5% Concentration Test for
Principal Shareholders or Owners — IRC 137(a)(3)
__________________________________
(Company Name)
Plan Year Ended
_______________
Nontaxable benefits paid to principal shareholders or owners
Nontaxable benefits paid to all participants
(A)
_______
Total benefits paid
(B)
Percentage of benefits paid to principal shareholders or owners (A : B)
% (C)
Conclusion:
If (C) is greater than 5%, all amounts paid to shareholders and owners under
IRC Section 137 are taxable.
2011
7-39
Flexible Benefits Training
IRC Section 125 — Cafeteria Plan
25% Concentration IRC 125(b)(2)
__________________________________________
(Company Name)
Plan Year Ended_____________________________
Total nontaxable benefits paid to all participants who are key employees
__________(A)
Total nontaxable benefits paid to all other participants
____________
Total nontaxable benefits paid
_____________(B)
Percent of nontaxable benefits paid to participants who are
key employees (A / B)
____________% (C)
Conclusion:
If (C) is greater than 25%, participants who are key employees will include in income any “nontaxable
benefits” received for the plan year.
2011
7-40
Flexible Benefits Training
Discrimination Tests Guide for Cafeteria Plans (2011)
“Haves”
Name
1. Percentage Test or
2. Classification Test (410(b))
HC
HC
3. Benefits Available Test
HC
4. Discriminatory in Operation
HC
Exclude
1
2
3
4
5
Definition
§105
5 highest pd officers
Owns more >10% stock
Apply 318
Highest pd 25% of all eligibles
Calculation
Consequences
70% / 80% Test
1HC$ X (HC$/Total$)
Excess Reimbursement
Excess Reimbursement
1HC$ - Max limit for NHCs
Excess Benefits
1HC$ - Max limit for NHCs
Excess Benefits
§ 125
1. Eligibility
HC
2. Contributions and Benefits
HC
3. 25% Concentration Test
Key
1. Contributions and Benefits
HC
2. Classification Test (410(b))
HC
3. 55% Average Benefits Test
HC
4. 25% Concentration Test
(5% Owner’s Test)
An officer
Owns >5% stock
An HCE
Apply 152
Officer & >$140,000(I)
>5% ownership
>1% ownrshp & $150,000
Apply 318
(416(i))
§ 129
6
7
8
4
5
9
401(b)
Limit 3 YOS
Participate 1st day
HC Taxed
Facts and Circumstances
HC Taxed
Key$ / Total$ = ≤25%
.333 X Nonkey =
Key$ limit
>5% owner prior/current
Apply 318
>$95,000 prior year
(414(q))
“5% owner”
Keys Taxed
After end of plan year,
total $ taxable
Can adjust during year
Everyone can elect
same benefits
HC Taxed
HC Taxed
>5% Owner
Apply 1563
HC$/HCs eligible = A
NHC$/NHCs eligible = B
B/A must be ≥ 55%
HC Taxed
“5%Owner”$/Total$ ≤ 25%
HC Taxed
§137
1. Classification Test
(410 (b))
2. 5% Concentration Test
HC
414(q)
“Shareholders” or
“Owners”
Indexed figures
Highly Compensated Employee
Top Paid Group of 20%
Key Employee, Officer
Base Year
1987
$75,000
$50,000
$45,000
1. Employees with less than 3 YOS
2. Employees not attained age 25
3, Part-time or seasonal who work less than 35 hrs
4, Union
5. Nonresident aliens with no US income
6. Not completed 6 MOS
7. Work less than 17 ½ hrs
8. Work not more than 6 mos per year
9. Under age 21
2011
4
HC Taxed
>”5%”$/Total$ ≤ 5%
>5%Owner
Spouse or
Dependent of above
2009
2010
$110,000 $110,000
$110,000 $110,000
$160,000 $160,000
2011
$110,000 Look back year
$110,000 Look back year
$160,000 Look back year
318: Spouse, children, grandchildren, or parents
152: Spouse and dependents
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Flexible Benefits Training
“5%” Taxed
2011
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Flexible Benefits Training
2011
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Flexible Benefits Training
Employee/Participant
Flexible Benefit Plan —
Authorization for Direct Deposit of Reimbursement Claims
Employee/Participant Name: ____________________________
Employee SSN __________________
Company Name: ______________________________________
I hereby authorize (insert Plan administrator name here). to initiate credit entries to my:





checking account
or





savings account
indicated below and the depository named below (Depository) to credit the same to such account.
**An actual voided check must be attached**
Staple voided check here
This form will be not be processed without a voided check
Account Number: ________________________________________________ ______________
Depository (Financial Institution): _________________________
City:______________________________________________ ___
Branch:____________________
State :________________________
Bank ACH Transit Routing Number ________________________________________________
This authority will remain in full force and effect until MHM Business Services, Inc. has received written notification from me of its
termination in such time and in such manner as to afford MHM Business Services a reasonable opportunity to act on it.
Signature _________________________________________
Date ______________________
Fax or mail to:
1-555-555-1212
Company Name
Company Address
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Guide to Allowable Medical Expenses Reimbursed
through an IRC Section 125 Cafeteria Plan
1. Date Expense Incurred
a. Services were rendered during employer’s cafeteria plan year
b. Services were rendered during the participant’s eligible period of coverage
2. Whose medical expenses can you include?
a. Participant
b. Spouse
c. Dependents
i. A person that lived with participant for the entire year as a member of participant’s household or
is related to participant.
ii. Person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the
calendar yea in which participant’s tax year began.
iii. Participant provided over half of that person’s total support for the calendar year.
iv. Adopted child
1. Child qualified as participant’s dependent when the medical services were provided.
v. Child of divorced or separated parents
1. If either parent can claim a child as a dependent under the rules for divorced or separated
parents, each parent can include the medical expenses he or she pays for the child even if
an exemption for the child is claimed by the other parent.
vi. Support claimed under a multiple support agreement
1. If participant is considered to have provided more than half of a person’s support under
such an agreement, the participant can claim medical expenses for that person.
3. Medical Definitions
a. Amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of
affecting any structure or function of the body.
b. Transportation for and essential to medical care
c. Legally obtained drugs or biologicals that require the prescription of a physician or is proved to be
medically necessary for use by individual
d. Cosmetic surgery or other similar procedure to treat a deformity relating to congenital abnormality, a
personal injury, or disfiguring disease.
i. Procedure promotes the proper function of the body
e. Excess Cost
f.
Capital expense item for medical care
i. Permanently improve property
ii. Only expenses in excess of the increase in the value of the related property
iii. Operation or maintenance expenses of a qualifying medical capital asset
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4. Primary Purpose Test
a. Was the expense incurred at the direction or suggestion of a physician?
b. Did the treatment bear directly on the physical condition in question?
c. Did the treatment have a direct or proximate therapeutic relation to the bodily condition so as to justify a
reasonable belief that it would produce the desired results?
d. Was the treatment proximate in time to the onset or recurrence of the disease or condition so as to make
the treatment specific to the condition rather than for general physical improvement?
5. “But For” Test
a. Would the medical expense have been incurred “but for” the disease or illness?
6. Reasonableness Test
a. Is the medical expense reasonable?
b. Is the expenditure for other than personal, living, and family expenses?
7. Factual Determination Test
a. Based on the facts and circumstances, was the medical expense incurred to prevent or alleviate a medical
condition?
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8.
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