SABC Newsletter                             

  Southern Administrators and Benefit Consultants, Inc.

July, 2002

At a recent meeting, IRS officials commented on the recent IRS guidance on the tax deductibility of weight-loss programs.  The general guidance provided in the revenue ruling is that the cost of participation in a weight-loss program as treatment for a specific disease will be considered the cost of medical care and thereby reimbursable under Unreimbursed Medical, provided the other section 125 rules satisfied. However, the cost to participate in a weight-loss program to improve an individual's appearance, general health, and sense of well-being, and not to cure a specific ailment or disease, is not considered medical care and not reimbursable. In order to receive reimbursements for weight-loss programs a letter from a doctor showing a diagnosis of obesity must accompany the request for reimbursement.

Fee's for weight-watchers programs are reimbursable, but not food items associated with those programs.  Country club or health club memberships are not allowed, however, if the club charges a specific fee to utilize exercise equipment that is separate from the overall club membership dues, then this fee would be reimbursable provided the person had a medical condition.

Before making an election based on weight-loss please contact us so that we may assist you in making your election an verify the eligibility of the expense.

Dependent Care Elections for 2003

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included changes in IRC Section 21 dependent care credit limits.

Effective for 2003, those changes are:

The maximum amount of dependent care expenses eligible for the      credit increases from $2,400 to $3,000 for one qualifying individual, and from $4,800 to $6,000 for two or more qualifying individuals.

The maximum credit percentage increases from 30% to 35%.  

The adjusted gross income (AGI) level at which the credit begins to phase out increases from $10,000 to $15,000.

Although EGTRRA makes changes to the dependent care tax credit, no corresponding changes are made to the tax exclusion under IRC Section 129 that applies to dependent care flexible spending accounts (FSAs) funded through a cafeteria plan.

For 2002, the general threshold  where the dependent care tax  credit and dependent care through the cafeteria plan provided about the same tax savings, was an adjusted gross income (AGI) of  $25,000.   Beginning in 2003 that threshold is an AGI of about $39,001 to $41,000.

In 2003, a single parent filing as head of household with one child and $3,000 of dependent care expenses may have better tax savings using the tax credit.

An employee with two or more children with $6,000 in dependent care expenses could utilize both the dependent care credit and the cafeteria plan. The employee could elect $5,000 through the cafeteria plan and claim the remaining $1,000 through the tax credit.

Before making your 2003 dependent care election, please contact your tax advisor to see which method or combination will best serve you.

WE WILL BE CLOSED JULY 4TH IN OBSERVANCE OF INDEPENDENCE DAY