A recent IRS Information letter confirms that a health flexible spending account program with a debit card feature must apply proper substantiation processes.
A health FSA allows a participant to be paid with pre-tax dollars for un-reimbursed medical expenses. The total amount that a participant elects to contribute to a health FSA for the year may be used immediately to pay eligible reimbursable expenses. Expenses may be reimbursed only if they are incurred during the plan year (plus any grace period) while the individual is a participant in the plan. An expense is incurred at the time the medical care or service giving rise to the expense is furnished and not when the amount is formally billed, charged or paid.
An expense must be for medical care to be eligible for reimbursement from a health FSA. An expense is for medical care if it is incurred to diagnose, cure, mitigate, treat, or prevent disease or affect any structure or function of the body.
To take advantage of the tax treatment permitted for health FSA contributions and reimbursements, the plan must review submitted claims to make sure the expense is for medical care in accordance with IRS rules. This requires independent substantiation from a third party.
When a debit card linked to a health FSA is used to pay for the expense, the plan must still make sure the expense is eligible for reimbursement.
The IRS requires that every transaction made with any type of Flexible Spending Account prepaid debit card must be substantiated to confirm that the cardholder is using the card to pay for an eligible FSA expense. The IRS considers some expenses paid by a debit card to be automatically substantiated at the point of sale. For example, if the card is used to pay a copayment amount or for a prescription, the expense may be automatically substantiated if the plan’s copay amount is identified in the debit card system. In this instance, additional documentation will not be needed for the expense. Any charge that does not match a pre-approved confirmation amount will require substantiation before it is eligible for reimbursement.
The IRS recently confirmed in an Information Letter that a FSA with a debit card must require additional documentation when the card swipe is not automatically substantiated. If the requested substantiation is not provided timely, the plan must deactivate the debit card.
According to the Letter
“Medical expenses paid or reimbursed from a health FSA must be verified by an independent third-party that substantiates the expenses. Substantiation for medical expenses includes information describing the service or product, the date of the service or sale, and the amount of the expense…
If the information provided during the debit card transaction does not satisfy the substantiation requirements, the plan administrator must request additional information to substantiate the medical expense. The plan administrator must deactivate the debit card if the medical expense is not timely substantiated.”
The IRS Letter also confirms that a plan may implement more stringent documentation processes to make sure the plan operates in accordance with IRS rules.
A copy of the Information Letter may be accessed by clicking here.
