Compliance & standards

How to ensure Flexible Spending Account (FSA) claims are compliant

Certain healthcare expenses paid for with pre-paid FSA debit cards can be auto-substantiated. Know how to substantiate FSA claims for compliant administration and to protect tax savings.

 Min Read 

Understanding the benefit of FSAs 

Many companies provide Flexible Spending Accounts (FSAs) as part of the benefits package to help cover the cost of eligible healthcare and dependent care expenses. Participating in FSAs provides employees with significant tax savings. Depending on income and other factors, employees save approximately 30% of the amount contributed to the account. For example, if a participant contributes the maximum amount of $3,050 to use towards Healthcare FSA claims, that means an additional $1,000 in cash. The savings can be even greater for a Dependent Care FSA participant making the maximum $5,000 contribution. 

FSAs are mutually beneficial for employers and employees. Participation is a great way to save money and provide employees with valuable benefits. FSA contributions are exempt from federal and state income taxes–as well as Medicare, Social Security, and federal unemployment taxes. In other words, employers do not need to pay Medicare, Social Security, and federal unemployment taxes on all contributions. 

The importance of FSA claims & compliance

While the tax code provides FSA participants with significant benefits, the savings come with conditions. Compliance with a series of IRS rules is necessary for the plan to qualify for tax savings. That said, employers and employees must comply with IRS guidelines for filing an FSA claim. If the plan doesn’t follow the rules, the tax savings for the employer and all participants disappear. For this reason, plan sponsors and TPAs must take adherence to the rules seriously.  

FSA claim substantiation requirements

Among the critical FSA rules is the requirement to substantiate every participant's claim. Participants can only use FSA funds for their own and dependent's healthcare. Substantiation is just a fancy way of saying the participant proved to the plan that funds will be used for an eligible expense incurred by the participant, spouse, or dependent.

The IRS Office of Chief Counsel recently released a memorandum highlighting the importance of proper FSA claims substantiation. While the memo did not provide new information, it reaffirmed proper substantiation procedures and outlined the potential risk to FSA plans that take administrative shortcuts. It is critical that FSA plan sponsors work with administrators that properly substantiate claims to ensure the tax savings for all participants.

The memorandum reminds plan sponsors that all FSA claims must be substantiated with documentation from a third party that outlines the following information:

  1. The service provided
  2. The date the service was incurred
  3. The amount of the service
  4. The name of the individual that incurred the service

Without the information, a claim cannot be substantiated and should not be reimbursed. 

Auto-substantiating an FSA claim

Now the good news - certain expenses paid for with a prepaid debit card can be auto-substantiated. Auto-substantiated claims do not require participants to provide additional documentation after using the card. 

Claims that can be auto-substantiated include:

  • Claims Incurred at Merchants Using the Inventory Information Approval Systems (IIAS)
  • Copayments Matching Claims at Medical Providers and 90% of Pharmacies
  • Recurring, Previously Approved Claims at Medical Care Providers and 90% of Pharmacies
  • Real-Time Verified Claims at Medical Care Providers and 90% of Pharmacies

The IRS emphasized that any claim that is not auto-substantiated requires the participant to submit additional documentation to the plan. 

Specific substantiation shortcuts are prohibited, including:

  1. sampling (only substantiating a small percentage of claims), 
  2. auto-substantiating de minimis claims under a certain dollar amount,
  3. self-certification (only requiring information from the employee and not a third party), 
  4. and auto-substantiating claims at certain preferred providers. 

The memorandum is clear that using these shortcuts will disqualify the plan and none of the benefits provided will be excludable from income. Plans or administrators using these methods put in jeopardy the valuable tax benefits experienced by the employer and all plan participants.

90% of card transactions purchased with The Forma Card are auto-substantiated through IIAS or copayment matching. For the limited number of claims that cannot be auto-substantiated, we require additional documentation from the member to substantiate the expense in accordance with IRS rules. 

Dedicated FSA compliance support

As a pre-tax provider, we have a dedicated compliance team keeping a close watch over IRS regulations and mandates. At Forma, we pride ourselves on providing compliant plan administration so you and your employees can count on those significant tax savings. For more information about FSA claims and compliance, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts.