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Overview
Even with the best of health care plans, there are certain expenses the plans don't cover. With a Medical Reimbursement Account, you can set aside money from your paycheck to pay for those expenses. The money you set aside is exempt from taxation, so you end up owing fewer taxes on your income.
For most employees with out-of-pocket medical expenses (i.e., the expenses have not been reimbursed and reimbursement will not be sought from any other source), a reimbursement account offers a better tax break than claiming a deduction for those expenses on your tax return. That's because federal tax law currently allows you to deduct health care premiums and expenses on your income tax form only if your medical expenses for the year exceed 10 percent of your adjusted gross income. You would need to have very high out-of-pocket medical expenses and a low taxable income to reach that 10 percent level.
This section explains the kind of expenses you can pay for with a Medical Reimbursement Account and other important rules of the program. Please read it carefully. Although a reimbursement account is a great way to lower your taxes and save money for certain expenses, you will forfeit any funds left in your account if you don't claim them by the deadline. You can avoid this possibility by following these simple steps:
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Be sure expenses qualify. Once funds have been deducted from your paycheck and credited to your account, you can only claim them if you or an eligible dependent incurs an expense that's reimbursable under the program. An expense is incurred on the date the service is provided, not when it is billed or paid.
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Estimate expenses conservatively. It's better to underestimate costs than overestimate. If you overestimate how much you expect to spend on eligible medical expenses, you'll end up with more money in your account than you can claim for reimbursement. Leftover funds cannot be carried over to the following year.
- Meet the deadline for claims. The deadline to submit claims for expenses incurred in the current plan year is June 30 of the following plan year. Please see Deadline to Claim Funds for extensions under the 2020 and 2021 plan years.
Eligible Dependents
A person is considered your dependent if:
- He or she is your child, stepchild, adopted child, or foster child.
- He or she is under age 27 for the entire plan year (for Reimbursement Account purposes only, not health/dental insurance). A child who reaches age 27 at any time during the plan year is not eligible, even prior to their 27th birthday.
- He or she is your spouse.
There are also special rules defining dependents in cases of multiple support arrangements where no single person provides more than half the dependent's support, children of divorced parents, and persons living outside the United States. Consult a tax advisor for more information. Consult a tax advisor for more information.
For an individual other than your spouse and/or dependent children, you may be required to certify in writing that he or she is your dependent according to the criteria described above. This may include your domestic partner. Federal law does not recognize a domestic partner unless he or she otherwise qualifies as a dependent under Internal Revenue Code section 152.
Reimbursable Medical Expenses
You may claim reimbursement for out-of-pocket medical services and/or supplies provided to you, your spouse, and your dependents (see "eligible dependents") if the services/supplies are related to:
- The diagnosis, cure, prevention, or treatment of a disease affecting any part or function of the body, or
- Transportation primarily for and essential to this medical care.
If you participated in a medical account in the past, you should still review the IRS rules regarding reimbursable expenses. These rules change periodically causing some expenses that once were reimbursable to now be ineligible, and expenses that were not eligible to become eligible.
Contact ASIFlex at (800) 659-3035 if you have questions about reimbursable expenses. If you enroll for the current plan year, you can only claim reimbursement for medical services and/or supplies that are provided from the effective date of your enrollment through March 15 of the following year, regardless of when you were billed for or paid the expense. Your deadline to incur expenses maybe earlier if you lose eligibility during the plan year. You must be enrolled as of December 31 to be eligible for the extension through March 15. Please see Extension of Benefits for extensions under the 2020 and 2021 plan years. - If you enroll during an open enrollment period, your effective date of enrollment is January 1, of the following year.
- If you enroll as a newly eligible employee, see "Deadline for newly eligible employees to enroll," for effective dates of mid-year enrollments.
Examples of reimbursable expenses are listed below. Contact ASIFlex at (800) 659-3035 if you have questions about reimbursable expenses.
Examples of Reimbursable Medical Expenses
- Acupuncture
- Alcoholism treatment
- Ambulance service
- Artificial limbs and teeth
- Birth control pills
- Braille books and magazines
- Chiropractic care
- Contact lenses
- Co-Payments
- Crutches
- Dental care (expenses for cosmetic dentistry is not covered)
- Drug addiction treatment
- Eyeglasses
- Eye surgery
- Hearing aids and exams
- Lab fees
- Mileage expenses
- Orthodontic treatment
- Prescription drugs (does not include Imported)
- Prosthetic devices
- Psychiatric care
- Psychoanalysis
- Reading glasses
- Telephone for hearing impairment
- Transportation for medical care
- Vaccinations
- Wheelchair
Letter of Medical Necessity
The IRS requires Medical Reimbursement Account funds to be used for the cure, prevention or treatment of a disease or condition. You may not use your Medical Reimbursement Account for general health or cosmetic purposes. When an expense or medication can be deemed as cosmetic, the administrator requires that a healthcare provider (doctor, dentist, etc.) define the treatment as prescribed for a specific medical condition.
Have your healthcare provider complete the Letter of Medical Necessity - ASI (PDF) | (RTF) and submit the completed form along with the expense to which it refers.
In lieu of a Letter of Medical Necessity, ASIFlex will accept a letter from your healthcare provider (on letterhead), which identifies the specific medical condition and prescribed treatment. The letter must be signed and dated by the healthcare provider.
Related Expenses that are Reimbursable
Meals and lodging: The cost of meals and lodging is reimbursable if the expense is incurred while an eligible individual is away from home and receiving health care treatment. Meals are reimbursable only if the expense is incurred in a medical facility.
Orthodontia: Initial requests for reimbursement of orthodontic treatment must include a contract or statement from the orthodontist. This documentation must reflect the beginning date of the treatment plan, total cost of treatment, and estimated length of treatment. Reimbursement of the full or initial payment amount may only occur during the plan year in which the braces are first installed. Reimbursements for monthly payments are made on or after the payment is due and paid.
Prescription drugs: Requests for reimbursement for prescriptions must include the date the prescription was filled, the prescription number, and the name of the medication. The prescription name is required to allow ASIFlex to identify that the prescription cannot be used for cosmetic purposes. If the prescription is one that is prescribed for cosmetic purposes as well as to treat specific medical conditions, a Letter of Medical Necessity will be required.
Transportation: You may claim mileage for transportation required for health care. Indicate the number of round trip miles on your reimbursement claim form and your receipt for prescription drugs, doctor's visits, etc. You can also claim parking and/or toll expenses if you provide a receipt. Public transportation also requires a receipt. Submit claims for travel expenses at the same time you are filing a claim for the medical expense. Check CalHR's or ASIFlex's website for current mileage rates.
Non-Reimbursable Medical Expenses
Insurance plan premiums are not reimbursable (even though mentioned in IRS Publication 502). For example, any out-of-pocket premiums for health insurance, dental insurance, long-term care insurance, and life insurance are not reimbursable.
Expenses that only benefit general health are not reimbursable. For example, health club expenses for general good health purposes are not reimbursable.
Expenses that are solely for cosmetic reasons are not reimbursable. For example, dental procedures to whiten or cap teeth and orthodontic procedures primarily cosmetic in nature are not reimbursable.
Face-lifts, hair transplants, prescription drugs for hair growth, electrolysis (hair removal), and massage therapy generally are not reimbursable. However, surgery or procedures to alleviate, treat, mitigate, or prevent a medical condition are eligible for reimbursement. Therefore, if you claim reimbursement for something that also could be considered cosmetic, you must submit a Letter of Medical Necessity.
Annual Limits on Medical Account Deductions
If you enroll in a Medical Reimbursement Account, your contributions to it must be:
- At least $10 per month, and
- No more than $2,750 per person per year. (This is a change from prior years.)
In other words, over a 12-month period you may contribute a minimum of $10 per month up to a maximum of $229.16 per month. If you enroll mid-year, you may contribute more than $229.16 per month as long as you don't exceed the $2,750 annual maximum.
Once the plan year starts (January 1st), you cannot change your monthly deduction amount except in limited circumstances called "permitting events." Please see Permitting Events for exceptions under the 2020 and 2021 plan years.
Estimating Your Medical Deduction Amount
To determine a monthly deduction amount that's appropriate for you, it helps to review out-of-pocket medical expenses that you, your spouse, and eligible dependents incurred over the past year on a routine basis and expect to continue incurring in the current or following year. (Be sure you only include medical expenses covered by this program).
Add those costs to any new covered expenses you, your spouse, and eligible dependents expect to incur during the plan year. This will give you a rough estimate of your total covered medical expenses for the year.
To calculate an appropriate monthly deduction, divide that total by the number of months you'll be enrolled. (If you enroll during open enrollment, divide your total estimated expenses by 12. If you enroll mid-year as a newly eligible employee, count the number of months from your effective date of enrollment through December 31.) Keep in mind the amount you calculate must fall within the annual limits.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
If you retire, leave state service, take an unpaid leave of absence, or experience a reduction in your work hours to an ineligible time base (i.e., less than half time), you can still contribute to your Medical Reimbursement Account through the end of the plan year. To do so, you must enroll in COBRA within 60 days after the date of one of these events (retirement, etc.). There are no tax savings on contributions you make under COBRA. Contact your department's personnel office for details.
Medical expenses incurred after you leave active pay status are reimbursable only if you continue contributing to your medical account under COBRA. If you choose not to continue your contributions, you may only claim reimbursement for eligible expenses incurred before you left active pay status.
Permitting Events
Once you enroll in a reimbursement account, you can't cancel or change your enrollment during the plan year unless you experience a change in status, called a "permitting event."
If you experience a permitting event, you may take the approved action that's listed below that change. You have 60 days following the date of your status change to take the corresponding action.
Your completed form(s) must be received at the State Controller's Office by the tenth of the month to be effective on the first of the following month. If your form is received after the tenth of the month, the effective date will be the first of the next following month.
2020 and 2021 Plan Year Relief under the Consolidated Appropriations Act of 2021 and IRS Notice 2021-15
You will be allowed the opportunity to make a one-time, mid-year election change on a prospective basis without a permitting event. You may stop, enroll or change your current monthly contribution for the Medical Reimbursement Account, Dependent Care Reimbursement Account or both plans. Retroactive changes and refunds are still not permissible under IRS guidelines. Once this one-time exception has been utilized, you must experience a permitting event in order to make another election change
Initial appointment to state service (includes reinstatement following a permanent break in service)
May enroll in reimbursement account(s) as newly eligible.
Marriage
May enroll in reimbursement account(s) as newly eligible or, if currently enrolled, may cancel/change reimbursement accounts.
Divorce (date of final divorce), legal separation, or annulment
May enroll in reimbursement account(s) as newly eligible or, if currently enrolled, may cancel/change reimbursement accounts.
Birth, adoption, or child placed for adoption
May enroll in reimbursement account(s) as newly eligible or, if currently enrolled in a reimbursement account, may increase payroll deduction.
Death of spouse or domestic partner
May enroll in reimbursement account(s) as newly eligible or, if currently enrolled, may cancel/change FlexElect elections.
Loss or commencement of spouse's or domestic partner's employment
May enroll in reimbursement account(s) as newly eligible or, if currently enrolled, may cancel/change reimbursement accounts.
Child enters military service
If currently enrolled in reimbursement account(s), may cancel/decrease payroll deduction based on this status change. New enrollments are not allowed.
Marriage of child
If currently enrolled in reimbursement account(s), may cancel/decrease payroll deduction. New enrollments are not allowed.
Death of dependent (other than spouse)
If currently enrolled in reimbursement account(s), may cancel/decrease payroll deduction. New enrollments are not allowed.
Child attains age 26
If currently enrolled in reimbursement account(s), may cancel/decrease payroll deduction. New enrollments are not allowed.
Health/dental plan no longer available
If currently enrolled in health and/or dental plan, may change coverage. May not change reimbursement account(s). New enrollments are not allowed.
Move out of group practice plan's service area
May enroll in a new plan if your plan no longer is available. May not change reimbursement account(s). New enrollments are not allowed.
New health and/or dental plan(s) in areas where none was previously available
If currently enrolled in health and/or dental plan, may change coverage. May not change reimbursement account(s). New enrollments are not allowed.
Payroll Status Changes
In addition to the permitting events listed above, here are some other payroll status changes and how they affect your FlexElect enrollment:
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Non-Industrial Disability Insurance (NDI): If you go on NDI while enrolled in a reimbursement account, your monthly deduction payments will remain in effect and will be reflected on your NDI check.
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Industrial Disability Leave (IDL) and Temporary Disability (TD): If you go on IDL or TD while enrolled in a medical reimbursement account, your account deductions will stop for as long as you're on IDL or TD. If you return to regular pay within the FlexElect plan year, your deductions will resume. However, if you go on IDL or TD with Supplementation (IDL or TD/S), your reimbursement account deduction will continue, provided the amount of your supplementation income is large enough to cover the full amount of your account deductions.
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State Disability Insurance (SDI) for employees in Bargaining Units 1, 3, 4, 11, 14, 15, 17, 20, and 21: If you go on SDI while enrolled in a medical reimbursement account, your enrollment will stop while you are on leave. If you return to pay status in the same FlexElect plan year, your enrollment will resume. If you are enrolled in the medical reimbursement account and wish to continue to submit claims for services provided during your unpaid leave of absence, you may elect to continue to make contributions through COBRA. Contact your department’s personnel office for details.
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Unpaid Leave of Absence: If you are on an unpaid leave of absence while enrolled in a Medical Reimbursement Account, your enrollment will stop while you are on leave. If you return to pay status in the same FlexElect plan year, your enrollment will resume. Keep in mind that if you are enrolled in the Medical Reimbursement Account and wish to continue to submit claims for services provided during your unpaid leave of absence, you may elect to continue to make contributions through COBRA. Contact your department’s personnel office for details.
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Military Leave: If you are called to active military duty for the War on Terrorism, you are eligible to retain your State benefits for up to 730 calendar days provided by Government Code section 19775.18. If you are enrolled in the Medical Reimbursement Account you may elect to continue your coverage via COBRA, or your deductions will stop for the duration of your leave.
