StormChaser: Debit Card Substantiation

Posted on Posted in IRS Reporting

If your plan is not administered correctly and in compliance with the regulations, you risk losing the plan all together. Is it time to review your TPA’s substantiation process?


While the IRS has issued guidance, FAQ’s, information letters and the like on substantiation requirements, some TPA’s simply ignore or deem them insignificant.

The Plan Sponsor has the legal obligation to ensure their plan is compliant.Under Prop Reg 1.125-1 (7)“If the cafeteria plan fails to operate according to its written plan or otherwise fails to operate in compliance with Section 125 and the regulations, the plan is not a cafeteria plan and employee’s elections between taxable and non-taxable result in gross income to the employees

Pro Reg 1.125-1 (7)(ii)(G)

“Failure to operate according to written cafeteria plan or Section 125. Examples of failures resulting in Section 125 not applying to a plan include: (G) Failing to comply with the substantiation requirements”

Prop Reg 1.125-6 (b)(2)

“All claims must be substantiated. As a precondition of payment or reimbursement of expenses for qualified benefits, a cafeteria plan must require substantiation in accordance with this section. Substantiating only a percentage of claims or substantiating only claims above a certain dollar amount, fails to comply with the substantiation requirements in 1.125-1”

NOTE: Not only Flexible Spending Accounts (FSA) Employer Sponsored Flexible Spending Accounts (ER-FSA) but also Health Reimbursement Arrangements (HRA) fall under common compliance violations, and are frequently identified, when there is a HDHP with dollar one coverage under an HRA with the use of a debit card, which requires every debit card transactions to be substantiated.

Documentation Required Before Reimbursing Expenses

Letter 2016-0013 addresses a health FSA participant who questioned whether the TPA could ask for certain information from his doctor before reimbursing his claim for “supplements related to a medical condition.” The letter explains that health FSAs can only reimburse medical expenses that the employee substantiates, and that reimbursement of ineligible expenses puts the health FSA’s nontaxable status at risk. Concluding that the TPA’s request for information was reasonable, the letter notes that if an administrator determines that documents from a physician’s office are inadequate, it is the employee’s responsibility to submit any additional documentation needed for reimbursement.

Don’t place your FSA, HRA and Premium Only Plans in jeopardy.  Substantiation may be a necessary evil and can make employees upset at times but just how upset would your employees be if their pre-tax contributions to the FSA and medical/dental/vision suddenly became taxable income?

Oh, and by the way Mr. Employee, here’s is a corrected W-2 so you can amend your tax return!

And don’t forget the plan sponsor! You would not want your HRA becoming taxable to you as the employer, that would certainly cause many issues not to mention amended quarterly reports.

If you would like a copy of any or all the below, please send me an email or give me a call.

  • Pro Reg 1.125-1 Cafeteria plans, general rules
  • Pro Reg 1.125-6 Substantiation of expenses for all cafeteria plans
  • Office of Chief Counsel Internal Revenue Service memorandum