Debit Card Substantiation Does Not Mean Paperless Substantiation

More than two years have passed since the IRS issued Revenue Ruling 2003-43. Yet, some struggle with debit card¹ rules for Health FSAs and HRAs. In fact, a few vendors even market cards requiring no paper substantiation (i.e., adjudication)! While this may look good, the old saying holds true: looks can be deceiving, and in this case, can carry devastating consequences, especially in light of an expected increase in IRS audits next year!

A recent Infinisource webinar outlined major steps to take and pitfalls to avoid in offering compliant debit cards. A sampling approach–where all claims are not substantiated–is prohibited. All claims must be substantiated, either by paper receipt or three situations (listed below) where auto-substantiation is permitted.

• When a co-payment for a service matches the copayment for that service under the participant’s group health plan. This matching must occur at a participant level and cannot be a co-payment multiple. Thus, a participant paying for annual check-ups of three family members that match a co-payment for that service should swipe the card three times to auto-substantiate.
• When a recurring expense matches a previously approved expense in terms of amount, provider and time period. Examples are mail-order drugs, typically available in a multi-month supply.
• When sufficient information is provided at the point of sale to confirm an expense as valid. This is called real-time substantiation and is common in a pharmacy setting. All claims not auto-substantiated require written receipts. A rule of thumb is to keep all receipts for at least one year.

Health FSAs and HRAs may reimburse only eligible medical care expenses. To that end, participants must make certifications. Upon enrollment and as each plan year starts, they must certify that (1) the card will only be used for eligible medical care expenses, (2) claims have not otherwise been reimbursed, and (3) they will not seek reimbursement elsewhere. The back of the card must contain these certifications, along with a statement that every card swipe reaffirms the certifications.

The IRS describes a pay-and-chase process for unsubstantiated claims (not necessarily in this order):

• Requesting repayment of the claim;
• Offsetting amounts with substantiated claims;
• Deducting amounts from wages to the extent permitted by state withholding laws;
• Suspending use of the card; and
• If all else fails, treating this as it would any other business indebtedness.

Some debit card solutions in the marketplace are offered for Dependent Care FSAs (DC FSAs) or even Transportation Plans. These approaches are risky at best, and Infinisource does not recommend them. The Ruling specifically applies only to HRAs and Health FSAs. It did not change the DC FSA requirement that an expense must be fully incurred or provided before it may be reimbursed. Most dependent care providers require up-front payment. Also, the Ruling did not change the voucher rules for transit expenses under a Transportation Plan.

So why comply? In an IRS audit, unsubstantiated claims would be recharacterized as taxable benefits. Recently, the IRS indicated it had hired an additional 50 auditors for the purpose of increasing next year’s benefit plan audits by about 10% (1,000 more) and plan inquiries by more than 50% (1,700 more).The resulting Code violation would also give IRS other remedies at its disposal, including employer penalties and plan disqualification.

Infinisource recently produced a webinar presented by Infinisource’s Chief Compliance Officer, Rich Glass, and Ashley Gillihan, partner in the Atlanta office of the national law firm of Alston & Bird, LLP, reviewing the ins and outs of electronic payment cards. To listen to this presentation that provides an explanation of claims substantiation, visit the website www.benefitsolved.com/seminars/main.html.

¹The Ruling allowed for credit cards and stored value cards also but for ease of reference we will use the term "debit card".

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