Using ‘Plastic’ for FSA Transactions

Posted on Friday, May 10, 2019

A few years ago the IRS liberalized the rules allowing the use of debit, credit or stored value cards for flexible spending account (FSA) payments, making it easier to administer those accounts for employees. (IRS Notice 2006-69)

Basics: With an FSA, employees can use pre-tax dollars to pay for qualified health care or dependent care expenses. Contributions are generally made through payroll deductions and the plans have become popular with people in all income  ranges because participation in an FSA reduces an employee's federal income tax bill. For the company's part, FSA participation translates into lower payroll tax because employers do not pay FICA taxes on employee salary-reduction amounts. 

In 2003, the IRS established guidelines for substantiating FSA reimbursements made by debit, credit, or stored value cards. (IRS Revenue Ruling 2003-43) Under this ruling, receipts, or further review are not required as long as the health care transaction meets the following conditions:

The dollar amount equals the amount of the plan's co-payment for the service.
The employer permits automatic reimbursement without further review of recurring expenses which match the amount, provider, and time period of previously approved transactions. 
The merchant, service-provider or other independent third party verifies to the employer that the charge is a medical expense.

Now the IRS has expanded the guidelines to include charges which are exact multiples of the specified co-payment charged by a health care provider. The transaction can't exceed five times the amount of the maximum co-payment and each service provider must be identified by its merchant category code.

Other changes include:

If a plan has multiple co-payments for the same benefits -- such as tiered co-payments -- exact matches of multiples or combinations of co-payments will be considered substantiated.
Employers can implement a system which approves or rejects payment card transactions using inventory control information.
The agency clarified the rules for direct third-party substantiation. The employee does not need to supply additional substantiation if the third party - usually, the health insurance company - informs the employer of the date of service and the employee's responsibility for payment.

Finally, the IRS has made it easier to use cards to pay expenses through a dependent care FSA. 

Example: An employee pays the initial expenses to the dependent care provider and substantiates the fees by submitting them to the employer. The plan permits the employee to use a card to pay for the lesser of previously substantiated expenses or the employee's salary reduction to date. The employee may also use the card for subsequent expenses.

This rule change helps employees avoid the requirement that dependent care expenses cannot be reimbursed before the expenses are incurred.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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