In December 2020 and on April 27, 2021, the IRS released two information letters that reiterated the substantiation rules for FSA debit card programs. One letter (Notice 2021-0003) responded to an inquiry on behalf of a participant whose card was deactivated for failure to provide requested documentation to substantiate expenses paid with an FSA debit card. The other letter (Notice 2021-0013) responded to a request for information about the substantiation rules for FSA debit card transactions.
The letters explain that health care expenses must be substantiated with the information describing the health care product or service, the date of the service or sale, and the amount of the expense. With the help of administrators, such as BASE®, review of additional information can be avoided with real-time substantiation. However, not all transactions have the information that is required to satisfy the substantiation requirements, so the plan administrator must request additional information and must deactivate the card if the health care expense is not substantiated in a timely fashion.
The review of the missing information can be avoided if the third party provided the information at the time of service, or point of sale, to verify the charge was for a health care expense – real-time substantiation. This could be through a Merchant Category Code (MCC) as well as the actual item or service identified by an Inventory Information Approval System (IIAS).
The letters also noted that FSAs may be designed to impose stricter standards and suggest contacting the employer/plan administrator about other options for submitting claims directly with required documentation.
There are a few things not mentioned in the letter.
- The debit card program rules also allow for automatic substantiation of card transactions at medical providers and 90% pharmacies (locations at which 90% of prior year gross receipts consisted of eligible medical expenses) where the dollar amount of the transaction equals an exact multiple of not more than five times the dollar amount of the copay under the participant’s health plan.
- Automatic substantiation is also allowed at merchants that have an inventory information approval system (IIAS) in place to ensure that cards are only used for qualified health care expenses.
With the IRS FSA substantiation rules, the bottom line is not all debit card receipts provide all the required information. The substantiation from a third-party must include the proper information, listed above or the card will be deactivated and will be so until the proper information is provided, and the claim is substantiated.
For more information, please call BASE® at 888.386.9680 or visit www.BASEonline.com.