IRS Reminds Employers With Health FSAs Of The Importance Of Substantiating Claims

In a Memorandum from the IRS Office of Chief Counsel, the IRS has reminded employers that sponsor health FSAs that all claims for benefits from the FSA must meet the substantiation rules.  Those rules, simply put, are that all claims must be substantiated by an independent third party.  An employee cannot self-certify claims.

An employee is permitted to substantiate a claim by presenting an explanation of benefits from an insurance company indicating the date medical care was provided and the employee’s responsibility for payment for that medical care (e.g., coinsurance payments and amounts below the plan’s deductible). The employee must certify that any expense paid through the health FSA has not been reimbursed and that the employee will not seek reimbursement from any other plan covering health benefits.  An FSA may pay or reimburse certain purchases made through a debit card that meets the extensive requirements set forth in the rules for their use.  In addition, a plan may allow a claim for a recurring expense to be automatically substantiated if it is for medical care from certain providers that matches the amount, medical care provider, and time period of previously substantiated expenses.

The Memorandum reinforces the prohibition on using substantiation based on a random sampling of claims or waiving substantiation of de minimis claims or claims from specified providers.

If a plan does not meet the substantiation rules, then it does not qualify as a health FSA and all claim reimbursements of all employees (even those who have actually satisfied those rules) must be included in the gross income of all employees who have received them and are subject to taxes on the employees’ incomes as well as FICA and FUTA taxes.

On a related matter, the memorandum also notes that claims for dependent care expenses from a dependent care FSA cannot be made in advance of the date the services are provided because such claims cannot meet the substantiation requirements.

The Memorandum does not break any new ground; it simply restates the existing rules.  However, it may serve as impetus to employers to review both the terms of their FSAs and their actual claim practices (or those of their TPAs) to ensure that the substantiation rules are being strictly observed.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your health and welfare plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.

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