Someone makes a purchase using funds from their health reimbursement arrangement (HRA) or flexible spending account (FSA). Then, they get a request asking for proof that the purchase is eligible. Why do we ask for documentation? The short answer is that it’s a legal responsibility of ours to verify that all claims are substantiated and eligible.

When substantiation is requested, this means that participants need to submit additional documentation to prove that the account funds were used for expenses that are allowed. In general, claims substantiation must include information from an independent third party (e.g., a receipt or bill) describing the service that has been incurred or the product that has been purchased, the date of the service or purchase, and the amount of the expense.

What products require substantiation by a Third-Party Administrator (TPA), such as Employee Benefits Corporation?

The IRS requires that participants with a health care FSA, dependent care FSA, or HRA provide substantiation to their employer or TPA to receive reimbursement. The IRS does not require individuals to substantiate their expenses when withdrawing funds from their HSA. HSAs are not exempt from substantiation – rather, it is up to the accountholder to maintain their own substantiation documentation for seven years and provide this documentation in the event of a tax audit.

IRS Code §1.125-6, IRS Notice 2003-43, IRS Notice 2006-69 and the 2007 proposed cafeteria plan regulations outline what is required to substantiate an expense and when auto-substantiation is acceptable. This has been further emphasized with Information Letter 2021-0003 and Letter 2021-0013 and most recently in the IRS Chief Counsel Memorandum 202317020 issued March 29, 2023.

Employers or TPAs that only substantiate claims over a specified dollar threshold or only substantiate a sample of claims are not abiding by IRS regulations. Because of this, employers and brokers should advise participants who use flexible benefit plans or HRAs to save all of their receipts, including receipts for expenses associated with their Benefits Card (also known as a debit card) transactions, and provide them to the plan administrator upon request.

What is the risk of not substantiating all claims?

If a plan fails to operate in accordance with the IRS requirement that all claims must be substantiated, the plan is at risk of no longer being considered a cafeteria plan, therefore all employees’ elections between taxable and nontaxable benefits result in gross income to the employees. In other words, the plan could lose its tax-free status even if the rules are disregarded for only one claim.

When is substantiation required by the IRS?

The IRS requires substantiation for every claim. Participants often feel that using a card will eliminate the need for substantiation, but this is not always the case. All card swipes must be substantiated, however, if certain conditions are met, the claim can be auto-substantiated at the point of sale and additional documentation will not be required.

Auto-substantiation occurs:

• When using a debit card at a health care provider (including dental and vision providers)
  • Copayment matching
  • Recurring expenses
  • Real time substantiation
• For purchases made through an inventory information approval system (IIAS)

Substantiation when using the Benefits Card at a health care provider (including dental and vision providers)

In general, EBC will ask FSA and HRA participants for substantiation of expenses from health care providers, except when the transaction meets the copay matching and recurring claims criteria.

Copay matching can occur if a Benefits Card swipe amount matches a known copayment of the respective health plan. Swipes are auto-substantiated for charges in the amount of the copayment or multiples of the copay (up to five times).

Example: Jane’s employer sponsors a group health plan that has an office visit copayment of $10. When Jane uses her Benefits Card at her doctor and is charged $10, the claim will be auto-substantiated and Jane will generally not be asked for documentation. This would also apply if Jane paid for multiple visits at one time, up to $50 (5 times the $10 copayment).

Recurring claims can occur when an FSA or HRA participant has claims on a recurring basis in the same dollar amount, from the same provider. After the first claim is substantiated, subsequent claims can be auto-substantiated.

Example: George sees a chiropractor every two weeks. Chiropractic care is not covered by George’s insurance, so George uses his health care FSA to pay for these visits. Each biweekly visit is $33. The first time George visits the chiropractor and uses his card, he will need to save his receipt and submit it when requested to substantiate his expense. Additional biweekly visits will be auto-substantiated using the recurring expense method and George will not need to send in documentation for future visits of the same type and expense amount.

Real-time substantiation can occur if a plan is established with a file feed between an insurance carrier and EBC for substantiation of claims. An FSA or HRA participant would swipe their debit card and EBC would monitor the file feeds for a matching amount and vendor in the carrier information. This option is rarely used for FSAs as it contains a large volume of Protected Health Information (PHI) that is not necessary in administering the plan. In addition, the administration required often causes delays in requesting substantiation. These delays make this plan option more frustrating for participants compared to other plan options.

EBC’s HRA will sometimes use a similar program when the Benefits Card is not used – but HRA claims are based off a carrier file feed. This process is different than auto-substantiation of debit card swipes.

Substantiation when using the Benefits Card at an IIAS merchant

Ideally, all card swipes at an IIAS merchant will be auto-substantiated and there would be no reason for a TPA to request documentation. IIAS, or inventory information approval system, is a point-of-sale technology that select merchants use that identifies transactions are eligible under FSAs and HRAs. Unfortunately, there are times in which purchases from authorized merchants, on authorized merchandise, will still require substantiation.

Typically, substantiation information from a card swipe is directly transmitted to a TPA, verifying that the swipe was for an eligible expense. However, there are times that the IIAS substantiation fails to go through. When this happens, participants will receive requests for documentation.

There is no way to predict when this will occur or for which purchases. FSA and HRA participants should know that there will be times that substantiation is required and that they need to provide documentation when it’s requested.

Example: Sam is enrolled in his employer’s health care FSA and purchases contact solution (an IIAS approved expense) monthly from an IIAS approved merchant. EBC does not request substantiation January – March based on the data that is provided from the merchant. In April, the supporting documentation is not transmitted to EBC due to a system outage. EBC will request substantiation for the April claim. In subsequent months, the information is again transmitted, and substantiation is not required.

After substantiation, do participants need to save receipts?

Yes! For all FSA, HRA, and HSA purchases, employers and brokers should encourage participants to hold onto itemized receipts and any associated documentation along with their annual tax records. This is their proof that they used their card correctly on eligible expenses. This is true even after participants have submitted the documentation for substantiation. If a participant ever receives an IRS tax audit, they need to be able to document all medical expenses. Participants should retain copies of this documentation with their tax records for up to seven years.

Substantiation Made Easy

Submitting documentation might seem like a nuisance, however, it’s a necessary part of receiving tax-advantaged benefit plans. EBC aims to provide a simple and straightforward experience for participants to submit supporting documentation using our online account or EBC Mobile app.

To submit documentation online or through EBC Mobile, participants simply upload their receipt from the merchant or service provider that provides the following information:

1. Date of service
2. Description of service
3. Name of provider
4. Dollar amount charged

This information is generally available on an itemized receipt, statement from a provider, or an Explanation of Benefits (EOB) from an insurance carrier.

If you’re an employer who’s looking to discuss substantiation requirements and best practices with your employees to make sure they understand what’s expected, download our presentation slides.