When I first opened a flexible spending account (FSA), I was hesitant to do so.
There were a few reasons why – including not being sure how much I should contribute and concern about the “use it or lose it” aspect of the plan – but one of the biggest concerns I had was documentation.
Would the IRS’ FSA rules requiring receipts for this, that, and everything in between mean that ultimately the tax savings realized wouldn’t offset the headaches produced?
Like many FSA users, I learned that yes, adhering to the substantiation guidelines wasn’t my idea of a good time, but I also discovered I had built these obstacles up too much in my mind and it was ultimately worth it (especially when it came time to pay for some dental procedures).
In this post, we’ll look at how big an issue FSA documentation requirements are for the masses and three things you should know about the rules.
What People Say About IRS FSA Rules for Substantiation
Many flexible spending account holders and future FSA plan enrollees share my original concerns about the FSA substantiation rules, as revealed in a 2016 survey of 4,182 FSA participants conducted by ConnectYourCare.
When asked what they would most like to change about their flexible spending account if they could, 49.9% responded “Decrease the need to submit documentation for eligible expenses” — easily making it the number one answer.
The next most popular answer, “Increase eligible expenses allowed, per IRS guidelines,” was selected by 29.2% of respondents.
People want flexible spending accounts to be as easy to use as possible, and they would prioritize that even over expanding what their FSA can be used for.
That’s an important but unsurprising insight, and it’s the reason we’re launching the recently announced ClaimsAlly, our new data management solution for FSAs, health reimbursement arrangements (HRAs), and dependent care assistance programs (DCAPs).
It allows ConnectYourCare to do more of the heavy lifting when it comes to auto-substantiation – the ability to automatically validate that FSA payments were for eligible expenses using electronic evidence without needing participants to manually submit itemized receipts or other documentation.
By applying some proprietary technology, the expected outcome is the significant reduction in suspended FSA cards while still fully satisfying all government requirements.
In a pilot study, a large national defense & security research organization saw up to an 80% increase in approval rates for claims which would have previously not received approval due to the need for manual substantiation by the participant.
In short, claims efficiency increased and the manual process decreased. Employees now can do less manual work to get claims paid.
How to Get Claims Paid Without Submitting Receipts
While ClaimsAlly will certainly help ConnectYourCare’s account holders in the coming weeks and months, there are some additional IRS FSA rules regarding substantiation specified in IRS Notice 2006-69 and Revenue Ruling 2003-43 that every flexible spending account participant as well as the employers offering FSAs should know – and which could help you reduce the amount of paperwork you’re prompted to manually submit.
Tip 1: Know Your Copay – Copay Matching
Charges at a health-care related provider’s office or merchant that exactly match the amount of a copayment for a specified service under a participant’s health plan can be automatically substantiated under IRS Revenue Ruling 2003-43.
Additionally, based on IRS Notice 2006-69, auto-substantiation can also take place when multiple copayments are charged at one time as long as the transaction exactly matches a multiple of the copay and doesn’t exceed five times the copay.
Here are some examples to illustrate that rule.
Scenario 1: You are enrolled in your employer’s health insurance plan as well as a health FSA and you have a $10 copayment for brand name prescriptions. You visit your regular pharmacy to pick up five brand name prescriptions at a cost of $50.
When you pay for the prescriptions with your FSA card, your employer’s electronic system should identify that you made a purchase at an approved pharmacy and that the amount of the payment exactly matches and does not exceed five times the prescription copay.
Barring any other circumstances – like the location isn’t using the Inventory Information Approval System (more on this in a moment) – the transaction should be automatically substantiated without requiring you to submit a receipt.
Scenario 2: Same as scenario 1, but this time you pick up a package of over-the-counter allergy medication and add it to your transaction along with five prescriptions. The amount owed for this transaction is $59.
Because this amount does not exactly match a multiple of your copay and exceeds five times that copay amount, the claim cannot be auto-substantiated and you would need to submit an itemized pharmacy receipt indicating:
- Name of the item(s) purchased (prescriptions and over-the-counter allergy medication)
- Name and address of the provider/merchant
- Date expense was incurred
- Amount charged for the expense
Takeaway: When using your FSA to pay for copays on eligible expenses, you may wish to avoid exceeding five times your copay for a given transaction if possible.
Tip 2: Take Advantage of Recurring Claims
Need to refill a prescription every month? After substantiating the first charge, you may not need to submit receipts for future refills of that prescription.
That’s because the IRS guidelines allow recurring charges to be automatically substantiated if they match the provider and dollar amount for a previously substantiated and approved transaction.
Keep in mind that the service or expense must exactly match each time, so this form of auto-substantiation is often applied to recurring prescription refills and eligible recurring services like physical therapy or orthodontia procedures.
Takeaway: Pay for the same eligible services or expenses at the same provider on a regular basis and the odds you’ll need to submit receipts or other documentation to substantiate these charges are significantly reduced.
Tip 3: Shop Where There is Real-Time Substantiation
Chances are good you’ve shopped at an Inventory Information Approval System (IIAS) merchant or service provider, even if you’ve never heard of IIAS.
This federally mandated system establishes a specialized inventory database identifying items that are eligible expenses, which can be paid for with health care payment cards as defined by the IRS.
Most service providers, pharmacies, grocery stores, wholesalers, and other retail locations are required to have this inventory control system in place in order to accept FSA cards and other health account payment cards.
The end result is that an eligible expense purchased at an IIAS location should be automatically substantiated in real time without requiring the submission of additional documentation.
A couple additional considerations:
- If you were to check out at a store with a mix of eligible expenses and non-eligible expenses in your cart, you’ll be required to pay for the non-eligible items separately and by a method other than your FSA card.
- There is an exception to the rule. Some stores are deemed 90% locations — those that certify that 90% or more of their transactions are for qualified health care account purchases. These “90%ers” are able to accept health care account payment cards, but purchases made at these locations WILL NOT auto-substantiate and the participant will be required to submit receipts or other documentation.
Takeaway: Review the list of IIAS compliant stores to know if where you’re shopping provides the benefit of auto-substantiation.
What You Can’t Do
The three tips above covered some things you can do to cut down on the amount of documentation you need to submit for claims. But it’s important to also know what the IRS won’t allow.
IRC Section 105 and 125 of the IRS tax code require all flexible spending account transactions to be substantiated as a way of verifying pre-tax money you and/or your employer have set aside for eligible medical expenses were, in fact, used solely for that purpose.
Not all services performed by or expenses incurred from a doctor, dentist, vision provider, or pharmacy are eligible. Teeth whitening performed by a dentist, for example, is not an eligible expense.
Additionally, the IRS does not allow self-substantiation – certifying that the expense or service you paid for was eligible without having supporting documentation from an independent third-party.
That’s why your FSA administrator may prompt you for receipts, explanation of benefits (EOBs), or other necessary documentation. When this occurs, it’s because auto-substantiation could not take place and additional information is needed in order to comply with IRS FSA rules.
While I’ve listed some of the ways you can utilize auto-substantiation in an effort to reduce the amount of documentation you must submit for claims, you should always save itemized receipts from every FSA payment card transaction and all EOBs you receive.
In the event auto-substantiation is not possible for whatever reason, saving your important documents ensures you’ll have these items to provide to the FSA administrator and/or IRS to prove the transaction was for an eligible expense or service if prompted to do so.
(Also keep in mind that the above auto-substantiation methods are allowed by the IRS, but an employer must choose to offer them as well. Check with your HR benefits administrator for your plan-specific details.)
Hopefully, however, now knowing about copay matching, recurring claims, and IIAS, you can make transaction decisions that increase your use of auto-substantiation.
Additionally, if your employer offers an FSA, HRA, or DCAP through ConnectYourCare, then the introduction of ClaimsAlly should result in an increase in auto-substantiation without risking IRS compliance issues.