IRS Confirms Consequences to Health Benefit Shortcuts

In the most recent memorandum released by the IRS, it addresses the substantiation requirements for health and dependent care expenses and the consequences of various substantiation shortcuts.    

If a 125 Cafeteria Plan qualified expense is not substantiated by a third-party administrator, those claims will result in gross income to employees, failing the plan to operate in accordance with the rules under the Code. 

The Flexible Spending Account (FSA) and Dependent Care Assistance Plan (DCAP) are employer-sponsored health benefits that allow employees to set aside money, on a pre-tax basis to pay for qualified health care and dependent care expenses. 

The BASE® FSA can help employees pay for their out-of-pocket health care spending not covered under an insurance plan and cutting payroll taxes by decreasing the total taxable payroll.  Employees now have extra funds to pay for the planned and unplanned health care expenses throughout the plan year. 

The BASE® DCAP can help employees pay for their employer-related dependent care expenses such as taking care of a child under the age of 13, a spouse or dependent incapable of self-care, or care for a disabled spouse or dependent outside of the home. 

These shortcuts that are impermissible are:

  • Self-certification
  • “sampling” of expenses
  • Certification by favored providers
  • No substantiation below a certain threshold
  • No substantiation of DCAP expenses

This memo confirmed that health care expense reimbursements, regardless of the amount, from a health FSA or a DCAP will be included in an employee’s gross income if the expense has failed to be fully substantiated by a third-party administrator in accordance with the IRS rules.  The amount of the benefit that the employees elected under the cafeteria plan will be included in income as wages and are now subject to FICA and FUTA. 

For more information, contact BASE® at 888.386.9680 or visit

And That’s a (ERISA) WRAP…

Many businesses know that when it comes to their retirement plans, such as 401(k)s, that they must comply with the Employee Retirement Income Security Act and its plan documentation and disclosure requirements, but few understand that the same goes for their health and welfare benefit plans. 

ERISA was designed to protect employees enrolled in the employer-sponsored health benefits and mandates that health plans must be in writing.  The Summary Plan Description and Plan Documents fill in the gaps of other documentation to help comply with federal regulations. 

The BASE® ERISA Wrap is designed to wrap around existing certificates of insurance and benefit plan booklets to provide the required provisions and information and protect the plan and the employer from steep penalties and fines. 

With only a few exceptions, if an employer provides a health and welfare benefit plan to their employees they are required to comply with ERISA, regardless of size, number of employees, or if the benefits are paid by the employer (HRA) or its employees (125 Cafeteria Plans). 

A Plan Document is a written document that contains all the terms of the plan.  It specifies things such as the participant’s rights, the benefits provided, the obligations within the plan, and the plan’s terms and conditions for administration. 

A Summary Plan Description is a written document that details the health benefit plan benefits and features that are easy to read and understand.   

To wrap this up…it is important to note that an SPD is not the same as the Summary of Benefits and Coverage (SBC).  The SBC is required for many health insurance coverage plans but is missing some of the information ERISA requires to be in compliance. 

For more information on the BASE® ERISA Wrap, contact BASE® at 888.386.9680 or visit