August, 2006
IRS Issues Guidance on the use of debit/credit cards in Health FSAs and HRAs
WHAT IS IT: In July 2006, the IRS issued Notice 2006-69 providing additional guidance regarding the use of debit cards, credit cards and stored value cards to reimburse participants in self-insured medical reimbursement plans, such as health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs) as well as guidance applicable to all health FSAs and HRAs. The notice also provides some guidance regarding dependent care assistance programs (DCAPs)
WHY IS IT IMPORTANT?- A plan sponsor may only make health and dependent care reimbursements from a participant’s flexible spending account if (1) the expense is qualified and (2) properly substantiated. Failure to comply with the substantiation rules can have tax consequences for participants.
HIGHLIGHTS OF THE NOTICE:
This Notice expands on the substantiation guidelines contained in Revenue Ruling 2003-43 as follows:
Co-payments
The automatic co-payment match substantiation method is expanded to include certain matches of co-payments. If a health plan has a co-payment and the dollar amount of the transaction at the health care provider (as identified by it merchant category code) is a multiple of not more than five times the amount of the co-payment, then the charge is fully substantiated without need for submission of a receipt or further review. The charge must be for services under the health plan covering the specific employee cardholder.
If the charge exceeds five times the co-payment, the transaction is treated as conditional pending confirmation of the charge by the submission of additional third-party information. The Notice provides examples of this provision.
Inventory Information Approval System
Under this method, the payment card processor provides a system for approving and rejecting card transactions using inventory control information (e.g., stock keeping units (SKUs)) with merchants who need not be health care providers. Card transactions using this method are fully substantiated without the need for submission of a receipt by the employee or further review. The system will compare the items purchased to SKUs that qualify as expenses for medical care under §213(d) including certain non prescription items and only approve those items. If the merchant, service provider or independent third party provides information to verify to the employer that the charge is for a medical expense, the charge is fully substantiated without the need for submission of a receipt.
However, if an employer adopts this method, the employer is still responsible for complying with recordkeeping requirements. The Notice provides examples of this provision.
Use of Cards for Dependent Care Assistance Programs
Substantiated dependent care expenses that
- have been submitted by the employee and
- approved by the employer or plan administrator
may be used as the basis for future recurring dependent care expense reimbursement. Such recurring expenses must be equal to or less than the previously substantiated amount and not exceed the participant’s DCAP account balance. Keep in mind that dependent care expense may not be reimbursed before the expenses are incurred.
GUIDANCE APPLICABLE TO ALL PLANS
Direct Third Party Substantiation
If the employer is provided with information from an independent third-party (such as an EOB from an insurance company) indicating the date of the §213(d) service and the employee’s responsibility for payment for that service (e.g., coinsurance amounts), the claim is considered fully substantiated without the need for submission of a receipt by the employee or further review.
Self-Certification
All amounts paid under a plan that permits self substantiation are included in gross income including amounts reimbursed for medical expenses whether or not substantiated.
WHAT SHOULD YOU DO NOW?
You should review your plan document and administrative procedures to make sure you do not allow self certification. If you use a card program you should review your program and any contracts with your vendors as well as their administrative procedures to ensure they comply with the new guidance.
Note: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plans. For more information on this ErisaALERT, contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
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ErisaALERT 2006-6
