IRS Clarifies Substantiation Requirements For Health FSA Debit Card Programs

CATEGORY: Public Education Matters
CLIENT TYPE: Public Education
DATE: Sep 30, 2021

On June 25, 2021, the IRS released two information letters that address how an employee can substantiate a request for reimbursement of a medical expense under a Section 125 cafeteria plan health flexible spending arrangement (health FSA) debit card program. A health FSA allows expenses paid or reimbursed to an employee to be excluded from gross income. Some employers issue debit cards to employees to pay for medical expenses covered under a health FSA.

Letter 2021-0003 explains that IRS rules require medical expenses to be verified by a third party in order to be excludable from the employee’s gross income. Proper substantiation for such expenses includes: (1) a description of the service or product; (2) the date of the service or sale; and (3) the amount of the expense.

Special issues arise when an employee’s medical expenses are reimbursed with a debit card linked to a health FSA account. Specifically, a debit card transaction may not collect all of the information needed to substantiate the expense. If the transaction does not include all of the required information, the administrator of the health FSA must request additional information from the employee to substantiate the expense. If the employee cannot provide the information in a timely manner, the plan administrator must deactivate the employee’s health FSA debit card.

Letter 2021-0013 discusses IRS rules for using a debit card to substantiate health FSA expenses, as described in Proposed Treasury Regulations Section 1.125-6. Specifically, an independent third party must provide the employer with a statement verifying the medical expense, either automatically or after the debit transaction. If at the time and point of sale, the third party provides information to verify that the charge is for a medical expense, then that expense is substantiated without the need for further review. Also, the health FSA sponsor may coordinate with an employee’s insurance provider to use the information provided in an explanation of benefits to substantiate a debit card charge without requiring more information.

Plan administrators can also approve payment of an employee’s recurring medical expenses incurred with certain providers that match the amount, medical care provider, and time period of previously approved expenses without additional substantiation.

An employer may impose stricter standards than those described above to ensure that the health FSA is used only to pay or reimburse medical expenses.

Although these letters do not change existing law, employers may find them useful in navigating what debit card transaction information is needed to substantiate reimbursement requests.

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