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Rules on flex benefits offer needed changes


It isn't often that we praise the Internal Revenue Service, but we think the agency does deserve recognition for at least part of its recently proposed rules covering flexible benefit plans.

As we report on page 1, the rules are a good attempt to make the arrangements fit better with real-world situations.

One example is orthodontia expenses. In the real world, orthodontists often bill and require patients to pay in advance for future services.

That presented a problem to employees with flexible spending accounts because of a general IRS requirement that FSAs cannot be used to reimburse employees for health care services until the services are delivered. That meant employees would have to pay the bill and then wait until the orthodontia work was performed before they could receive reimbursement from their FSAs. The IRS rules end that unfair situation.

More broadly, the rules make clear that employees can make pretax contributions through salary reduction to purchase health insurance coverage, not only from their employers, but through the individual market as well.

That addresses yet another real-world situation: Some employers, especially smaller firms, cannot afford to offer health care coverage. But they can set up a flexible benefit arrangement—as there is no cost involved—to allow employees to pay, on a pretax basis, for coverage from an insurer selected by the employee.

In our view—and now the IRS'—if employees can get tax breaks by purchasing coverage from their employers, there is no good policy reason why that same favorable tax treatment shouldn't be available if coverage is purchased elsewhere.

That's a vote for common sense, and we are happy to see that the IRS is providing it.