When an employer’s Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) offers a debit card for employee convenience, some debit card transactions cannot be auto-substantiated and require the employee to submit a receipt. The FSA/HRA administrator will make two requests for the receipt and if still not received will make a third and final request while turning off the employee’s debit card. If the employee’s substantiation does not come through, then the employee owes the employer a receipt or repayment. So, the employer must get involved before it is time to close out the tax year and issue Forms W-2.
Applies To:
Employer of any size sponsoring a Health FSA or HRA with a debit card.
Go Deeper:
Substantiation Is Required
FSA/HRA administrators are key partners in helping ensure substantiation rules are followed for FSAs and HRAs, including for integrated debit cards. Strict adherence to IRS rules is required or the FSA/HRA can be deemed non-compliant and all reimbursements become taxable.
Unsubstantiated Debit Card Claims
When it comes to debit card claims that could not be auto-substantiated, the FSA/HRA administrator will request receipts each month until received and disable the debit card on the third and final outreach.
If the employee still fails to submit required receipts, the employer must become engaged before year-end to work with the employee on submitting either a receipt or repayment. The employer should have access to an unsubstantiated debit card claims report to help accomplish this important year-end task.
HIPAA Privacy and Security
As a reminder, this report contains Protected Health Information (PHI), so the employer must follow their written HIPAA policies and procedures in accessing this report, storing it, and using and disclosing the data. For example, the employer should only grant the internal staff responsible for FSA/HRA oversight with permission to download the report, should require multi-factor authentication before accessing the system where the report can be retrieved, establish an encrypted firewalled part of the server for storing the data, never sending data to an employee’s work email that can be read by their supervisor, never discuss their overdue receipts with their supervisor, and adhere to all the other applicable HIPAA protocols.
Collecting Receipts (or Repayment)
The designated employer contact will want to verify if the employee has the required receipt or needs help understanding how to secure a compliant receipt, as sometimes the issue is the receipt they have does not show all the required content elements. Offering the employee instructions on how to set up a profile on a carrier or TPA website to download an Explanation of Benefits (EOB) is typically all that is necessary to help the employee obtain a compliant substantiation receipt.
Sometimes the employee will communicate that they have been trying to submit the receipt, but the FSA/HRA administrator’s system has not been able to receive it, in which case the employer may want to help interface with the administrator to identify and resolve any technological issue.
Sometimes it simply is not possible to track down a compliant receipt. For example, IRS FAQs addressing all sorts of “general health” expenses recently added a new FAQ for wearable health tech which are often advertised as reimbursable medical expenses without explaining the IRS’s rules for such a device to be deductible. Such misunderstandings are common and can result in owing repayment to the plan.
When this occurs, the employee should agree in writing to withhold the amount from future manual FSA submissions before year-end, or from the next paycheck(s) until fully repaid by year-end.
Last Resort Debt Collection (or W-2 Reporting)
When an employee does not cooperate with providing such written authorization, they are considered to owe the employer a debt. Usually there is a dollar threshold at which an organization will pursue debts in small claims court, and the IRS requires following that standard procedure here. If the amount owed is not enough to trigger such procedures, the employer does have a last resort option of forgiving the debt and reporting as taxable income on the W-2, but this method should be used very sparingly as a last resort (and hopefully based on the advice of legal counsel). If too many individuals are getting around the FSA use-it-or-lose-it rules by swiping a debit card without submitting required substantiation receipts, then the IRS can determine the FSA is no longer valid and can no longer be sponsored on a tax-favored basis. Similarly, HRAs are not permitted to provide tax-free compensation to employees for expenses that are not medical care. So, care should be taken to avoid tax-free reimbursements for various kinds of “general health” items the IRS warns about in the FAQ link provided above.
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