Section 125 Plan: Medical Information Data Bank

In response to your request, we have researched whether an employer could offer to employees the option to pay the fee arising out of an employee’s subscription to a medical information data bank with pretax dollars or as an excludable fringe benefit. It appears that the fee for this service could be marketed as reimbursable under a flexible spending arrangement (“FSA” or a nontaxable employee benefit.

Section 125 of the Internal Revenue Code (“the Code” determines the types of benefits which an employer can offer employees through a “cafeteria plan” as nontaxable income. A “cafeteria plan” is a written benefits plan in which all participants are employees, and the participants may choose among two or more benefits consisting of cash and “qualified” benefits. “Qualified” benefits are any benefits, which the Code expressly excludes from an employee’s gross income. Among the benefits, which are excludable from the gross income of an employee, are accident and health benefits for which an employer makes contributions. In addition, a cafeteria plan can provide employees the option to defer pretax dollars pursuant to an FSA and use them to pay for unreimbursed expenses for medical care.

“Medical care” expenses are those that are deductible under Section 213 of the Code. That is, amounts which a taxpayer pays for the diagnosis, cure mitigation, treatment or prevention of disease, or for the purpose of effecting any structure or function of the body. It does not include the cost of cosmetic surgery, unless it is a medical necessity.

In 1971, the Internal Revenue Service (“IRS”) held that a taxpayer could deduct the initial and annual dues for a service that provided storage and retrieval of personal medical information by a computer data bank as medical expenses under Section 213. See Attachment Rev. Ruling 71-282). The service allowed the rapid retrieval and furnishing of information relating to an individual’s illnesses, diseases, allergies, prescribed medication, vital sign statistics, blood type and family medical history to any physician attending the individual. According to the IRS, “the computer data bank facilitate [d] the diagnosis of a physical or mental effect or illness, and thus, serve [d] to prevent or alleviate a defect or illness.” Id. Further, the IRS held that where the employer paid the subscription fee, it was an accident or health benefit that was excludable from an employee’s gross income pursuant to section 106 of the Code, which excludes employer contributions to accident and health plans. Id. Although this Revenue ruling predates Section 125, the description of your service is substantially similar to the subject matter of the Revenue Ruling. (1) Thus, the coverage of the cost for the medical data bank service under Section 125 seems appropriate.

Best Regards.

Jay P. Krupin
Alison N. Davis
ATTORNEYS AT LAW