I have worn a beard for most of my adult life, and I appreciate a solid stand of men's facial hair. So I couldn't help noticing an article last week touting a growing industry in Turkey: Turkish mustache transplants. 

For a mere $5,000, the "follicly challenged" can have a cosmetic surgeon enhance their mustache or beard. The procedure is done under local anesthetic and takes only a few hours. In true medical tourism style, the procedures are being offered as part of "transplant packages" that may include additional amenities such as a beachside vacation on Turkey's Mediterranean coast.

If you're looking to boost your masculinity and catch a few rays in the process, this might just be the thing you've been waiting for.

That got me to thinking: This is bound to become wildly popular because - let's face it - who could resist a shot at the mustache of their dreams. Which means it's only a matter of time before we find an employee or two claiming reimbursement under a health FSA, HRA, or HSA for the cost of the procedure. It's medical, so it's covered - right?

Well, not so fast. 

To be reimbursed from a health FSA, HRA, or HSA, expenses generally must be for "medical care," and the tax code specifically excludes cosmetic surgery from the definition of medical care. What counts as cosmetic surgery? Any procedure that "is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness      Continue Reading...

As we have reported previously on this blog (see here), the IRS is considering modifying or eliminating the so-called use-it-or-lose-it rule for health FSAs, which is the rule that requires participants to spend down their entire account balances during the plan year (and any related grace period) or else forfeit the money. Legislative repeal of the rule has also been proposed.

Tax Analysts, which publishes tax-industry news, is reporting today that leading Treasury and IRS officials have said nothing will happen on this issue for 2012, at least as an administrative matter. (Congress theoretically could still act during the post-election lame-duck session, but that seems unlikely too.) However, the government did receive "a tsunami" of letters and comments in support of eliminating the rule, so we may see further movement on the issue in the near future.

With the cap on health FSA contributions reduced to $2,500 for plan years beginning on or after January 1, 2013, there is very limited opportunity for tax avoidance or deferral through health FSAs. So there is a sense that the use-it-or-lose-it rule may no longer serve a meaningful regulatory function. 

The U.S. House of Representatives approved a bill late last week that would partially repeal the use-it-or-lose-it rule for flexible spending account plans. The change would allow for a taxable distribution of up to $500 in unspent employee contributions remaining at the end of the plan year. Legislative attention to this somewhat obscure provision of the cafeteria-plan rules comes just days after the IRS separately announced it was evaluating whether the limitation should continue.

The bill would also repeal the PPACA restriction on reimbursement of over-the-counter drugs through health FSAs and HSAs. 

The Senate has yet to vote, but there appears to be some bipartisan support for the bill, primarily among senators -- including Democrat Al Franken of Minnesota -- who favor a separate provision that would repeal a tax on medical-device manufacturers.

A federal appeals court in Boston ruled late last week that a portion of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the rights of same-sex couples who are validly married under Massachusetts law. At issue in the case was a provision of DOMA that says only opposite-sex spouses may be recognized as spouses for purposes of federal law.

This has important implications for employee-benefit plans because several provisions of federal law grant spouses special rights. For example, spouses have survivor rights under retirement plans, and spouses can receive tax-free coverage and have special-enrollment and COBRA rights under group health plans. Under DOMA, these rights do not apply to same-sex spouses, but that could change if DOMA is struck down.

The case does not disturb existing state statutes and constitutional provisions that prohibit the recognition of same-sex marriages. But difficult questions may arise if a same-sex couple that is validly married in one state seeks to enforce rights under federal law against an employer or employee-benefit plan in a state that does not recognize same-sex marriage.

Ultimately, this is an issue that will be addressed by the Supreme Court, and now that a federal appeals court has ruled, review by the Supreme Court could come as early as next year.

The IRS issued Notice 2012-40 yesterday (click here for the notice), providing a number of important clarifications regarding the $2,500 cap on health FSA contributions that applies beginning in 2013.  The most surprising development is the IRS's interpretation that the cap applies on a plan-year basis, rather than a calendar-year basis.  This is important for employers with fiscal-year plans.  They will be able to wait until the first plan year beginning after December 31, 2012, to implement the cap, rather than using the transition rule or early implementation of the cap to ensure contributions during the 2013 calendar year do not exceed the cap, as was previously thought necessary.

Other key guidance points include:

• Clarification that unspent amounts carried over during a grace period will not count against the cap for the plan year in which the grace period occurs.
• Confirmation that the cap only applies to employee salary-reduction contributions to a health FSA.  Employer contributions (e.g., flex credits) and salary-reduction contributions to dependent-care FSAs do not count, nor do amounts credited to HSAs or HRAs.

In addition to interpretive guidance, the Notice provides a limited correction rule that will allow fixing some good-faith mistakes.  If a mistaken election to contribute more than $2,500 to a health FSA in a year is properly corrected, the error will not jeopardize the plan's status as a qualifying cafeteria plan. 

Of academic interest, the Notice also requests comments on the use-it-or-lose-it rule.  The implication is that the $2,500 cap may be low enough that concerns about excessive use of      Continue Reading...