What is the purpose of the new FSA rules?
A. The introduction to Reg. Sec. 1.125-2 states that the new FSA rules are intended to protect the integrity of the distinction between the taxable treatment of personal medical expenses and the more favorable tax treatment of employer-provided health plan coverage. There is significant concern that health FSA’s operate primarily to exclude from income amounts paid for personal medical expenses that would otherwise only be deductible to the extent that they exceed 7-1/2% of adjusted gross income. This concern is greater if there is no person, such as an employer or insurance company, who bears a risk of experience loss with respect to the health plan, and thus, has an interest in regulating the arrangement to minimize and substantiate claimed expenses. In order to limit the extent to which health FSA’s effectively operate to exclude amounts paid for personal medical expenses, the new regulations apply requirements to health FSA’s that are similar to the requirements that an independent
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