Question: Can employees use the dependent care FSA or health FSA to reimburse special education expenses for their children?
Compliance Team Response:
Dependent Care FSA: Generally Not An Eligible Expense
Educational expenses are not an eligible dependent care FSA expense. Those expenses are not considered to be for the “care” of the child.
However, the rules do provide that pre-Kindergarten expenses for pre-school are an eligible expense. Expenses for educational programs below the level of kindergarten are considered to be primarily care expenses.
Therefore, employees can reimburse a child’s special education expenses under the dependent care FSA only if they are for children below the level of kindergarten.
Health FSA: May Be An Eligible Expense
In some situations, the cost for schools that provide special education for those with a medical condition can be a medical expense.
The IRS issued a Private Letter Ruling stating that education designed to help someone overcome a medical disability will be a medical expense, provided:
- A physician or other qualified professional must diagnose a medical condition requiring special education to correct;
- The school has professional staff competent to design and supervise a curriculum providing medical care; and
- The primary purpose for attending the school is overcoming the learning disability (not ordinary education).
The most common examples would be teaching Braille to the visually-impaired, teaching lip-reading to the hearing-impaired, or proving remedial language training to correct a condition caused by a birth defect. The IRS also specifically stated that dyslexia can be sufficiently severe to be such a handicap.
Where the special education schooling does qualify as a medical expense, employees could pay for those expenses through any account-based health plan (FSA, HSA, HRA).
Dependent Care FSA
Treas. Reg. §1.21-1(d)(5):
(5) School or similar program. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are for the care of a qualifying individual and may be employment-related expenses. Expenses for a child in kindergarten or a higher grade are not for the care of a qualifying individual. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be for the care of a qualifying individual.
IRS Publication 503:
Expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are expenses for care.
Expenses to attend kindergarten or a higher grade aren’t expenses for care. Don’t use these expenses to figure your credit.
However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care.
Summer school and tutoring programs aren’t for care.
IRS Private Letter Ruling 200521003:
A taxpayer may deduct expenses paid during the taxable year for medical care of the taxpayer, spouse, or dependent, within the limits of section 213. Medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. Section 213(d)(1)(A). Only expenses incurred primarily for medical care are deductible. Section 1.213- 1(e)(1)(ii) of the Income Tax Regulations.
Helping the student overcome a physical or mental handicap and move on to normal education and living is the essence of special education. Normal education is not medical care because it is not designed to help someone overcome a medical disability. Thus, a physician or other qualified professional must diagnose a medical condition requiring special education to correct the condition for that education to be medical care. The school need not employ physicians to provide that special education, but must have professional staff competent to design and supervise a curriculum providing medical care. Overcoming the learning disabilities must be a principal reason for attending the school, and any ordinary education received must be incidental to the special education provided. Special education thus includes teaching Braille to a visually-impaired person, teaching lip reading to a hearing-impaired person, giving remedial language training to correct a condition caused by a birth defect, or overcoming other disabilities. Section 1.213-1(e)(1)(v)(a); Rev. Rul. 70-285, 1970-1 C.B. 52. Dyslexia can be sufficiently severe as to be such a handicap. Rev. Rul. 69-607, 1969-2 C.B. 40.
IRS Publication 502:
You can include in medical expenses fees you pay on a doctor’s recommendation for a child’s tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments, including nervous system disorders.
You can include in medical expenses the cost (tuition, meals, and lodging) of attending a school that furnishes special education to help a child to overcome learning disabilities. Overcoming the learning disabilities must be the primary reason for attending the school, and any ordinary education received must be incidental to the special education provided. Special education includes:
- Teaching Braille to a visually impaired person,
- Teaching lip reading to a hearing disabled person, or
- Giving remedial language training to correct a condition caused by a birth defect.
You can’t include in medical expenses the cost of sending a child with behavioral problems to a school where the course of study and the disciplinary methods have a beneficial effect on the child’s attitude if the availability of medical care in the school isn’t a principal reason for sending the student there.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).