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IRS Publication 503

Internal Revenue Code Section 125 defines "expense incurred" as follows:

"Expenses are treated as having been incurred when the participant is provided with the dependent care that gives rise to the expenses, and not when the participant is formally billed or charged for, or pays for the dependent care."  (This rule also applies to health care expenses.)

IRS Publication 503 is generally used by individual taxpayers in determining their deductible dependent care expenses.  Individual taxpayers can take a deduction when they pay for an expense, regardless of when the service was provided. Section 125 health care flexible spending account plans also use IRS Publication 503 to determine some eligible dependent care expenses, but must defer to Section 125 rules to determine when the expense is considered "incurred" and also with respect to the eligibility of over-the-counter drugs and medicines.  Thus, Section 125 flexible spending account plans must determine the eligibility of the expense based on the date the service was provided, without regard to when the service was paid for.

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