Substantiation of FSA Expenses

Posted by BAS - 18 May, 2023


The IRS Chief Counsel office issued a memorandum addressing claims substantiation for medical and dependent day care flexible spending account expenses. According to the memorandum, FSA expenses will be included in an employee’s gross income if any part of the expense is not substantiated by an independent third party. Self-substantiation is not permitted in any circumstance.


In order for an employer’s cafeteria plan FSA arrangement to satisfy IRS rules, the plan must have an independent third party (who is not the employee, the employee’s spouse or the employee’s dependent) review and approve all plan expenses. The employer may not allow an employee to self-certify a claim, nor may the employer evaluate only a “sample” of claims or claims above a set dollar amount. If the substantiation rules are not followed, the cafeteria plan will lose its tax favored status and any benefits that an employee elects under the plan will be included in gross income.

The information from the independent third party must describe the service/product, the date of service/sale, and the amount of the expense. If an Explanation of Benefits (EOB) is used for third-party substantiation, the EOB must include the date of the care, the employee’s share of the cost of care, a certification that the expense paid by the plan has not been reimbursed by insurance or otherwise, and that the employee will not seek reimbursement from any other plan covering health benefits.

The memorandum addresses debit card substantiation and confirms that every claim must be substantiated; plans are not permitted to use a sampling technique and are not permitted to exclude claims under a threshold dollar amount from the substantiation process.

Several examples are provided in the memorandum which may be accessed by clicking here

Topics: Dependent Day Care FSA, HR & Benefits Compliance, HR & Benefits News

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