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

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