In the realm of cafeteria plans, health Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs) play a crucial role. However, the process of claim substantiation often raises questions among administrators. This blog post aims to shed light on the IRS rules regarding claim substantiation for health FSAs and DCAPs.
The Necessity of Claim Substantiation
According to IRS rules, all health FSA and DCAP claims must be substantiated. This substantiation requires information from an independent third party describing the service or product, the date of the service or sale, and the amount of the expense. These requirements are designed to ensure that health FSAs and DCAPs reimburse only legitimate claims.
The Role of Debit Card Programs
IRS rules regarding debit card programs also require that claims be substantiated and reviewed. However, certain categories of expenses are treated as automatically substantiated without any receipts or review beyond the swipe.
The Risk of Substantiation Shortcuts
Administrators might be tempted to engage in substantiation shortcuts such as reviewing only a percentage of claims (i.e., sampling) or automatically reimbursing claims that are below a “de minimis” dollar threshold or that appear to be from medical or dependent care providers. However, these actions could jeopardize the income exclusion that would otherwise apply to reimbursements from these arrangements under the Code. This could result in all reimbursements becoming taxable, not just those approved using the impermissible techniques.
The Consequences of Non-Compliance
If a health FSA or DCAP fails to comply with applicable substantiation requirements, all employees’ elections between taxable and nontaxable benefits under the entire cafeteria plan will result in gross income. A March 2023 IRS Chief Counsel’s office memorandum reconfirms the substantiation requirements for medical and dependent care expenses, as well as the prohibition and consequences of sampling and other substantiation shortcuts.
While the process of claim substantiation might seem daunting, it is a necessary step to ensure the legitimacy of claims under health FSAs and DCAPs. Administrators must adhere to IRS rules and avoid substantiation shortcuts to maintain the tax benefits of these programs.
In today’s ever-evolving landscape of healthcare benefits, Health Savings Accounts (HSAs) have become a cornerstone for both employers and employees. With the rising deductibles of High Deductible Health Plans (HDHPs), employers are increasingly considering making contributions to HSAs to alleviate the financial burden on their workforce. However, the question arises: when should these contributions be made?
Here, we delve into the intricacies of timing employer HSA contributions to optimize benefits for both employers and employees.
Understanding the Contribution Window
HSA contributions for a taxable year cannot precede the start of that year or extend beyond the due date for the account holder’s federal income tax return for that year. Typically, contributions must fall between January 1 of the contribution year and April 15 of the following calendar year.
Factors Influencing Timing
Several factors come into play when determining the optimal timing for employer HSA contributions:
Prorating Based on Employment: Employers may prorate contributions for employees who haven’t worked the full year, either by making contributions ratably over the year or with prorated year-end contributions.
Risk of Overcontribution: Employers need to be cautious of exceeding the HSA contribution limit, which aggregates employer and employee contributions. Delaying employer contributions until year-end can mitigate this risk.
Employer’s Tax Deduction: For corporate taxpayers, the filing deadline without extensions is March 15. Contributions made by this date enable the company to take the deduction on the corporate tax return.
Nondiscrimination Testing: Employer contributions are subject to cafeteria plan nondiscrimination rules, necessitating careful consideration of timing to avoid issues.
Expense-Timing Considerations: Accelerated contributions may be beneficial for employees facing increased out-of-pocket expenses due to higher deductibles. However, this approach comes with its own set of challenges.
Ensuring Compliance and Administration
Cafeteria plan documents may need amending to accommodate new employer contributions, and timely communication with HSA trustees or custodians is crucial for crediting contributions to the correct year.
Conclusion
Navigating the timing of employer HSA contributions requires a nuanced understanding of regulatory requirements, tax implications, and employee welfare. By strategically evaluating these factors, employers can maximize the benefits of their HSA programs while ensuring compliance and efficient administration.
In conclusion, proactive planning and thoughtful execution are key to leveraging employer HSA contributions effectively, ultimately benefiting both employers and employees alike.
In a recent news release, the Internal Revenue Service (IRS) has reiterated important guidelines regarding the eligibility of health and wellness expenses for deductions and reimbursements under health Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs).
What Qualifies as a Medical Expense? According to the IRS, for an expense to be considered a medical expense under Code § 213, it must be directly related to the diagnosis, cure, mitigation, treatment, or prevention of disease, or must affect the structure or function of the body. This definition excludes expenses that are solely for general health benefits.
The Risk of Nonmedical Reimbursements: The IRS warns that if health FSAs or other account-based health plans reimburse nonmedical expenses, it could result in all plan payments, including those for legitimate medical expenses, being included in participants’ taxable income.
Misleading Claims and the Importance of Diagnosis-Specific Documentation: The IRS has expressed concerns about companies misleading individuals by suggesting that a doctor’s note can transform general food and wellness expenses into medical expenses. However, without a clear connection to a diagnosis-specific treatment or activity, these expenses do not qualify as medical expenses.
Case in Point: The Denied Claim Highlighting the issue, the IRS shared an instance where an individual with diabetes was denied reimbursement for healthy food expenses through his health FSA. Despite obtaining a doctor’s note from a company that advertised such services, the claim was rejected because the food did not meet the criteria for a medical expense.
Guidance for Taxpayers: For those seeking clarity on what constitutes a reimbursable medical expense, the IRS points to its FAQs on nutrition, wellness, and general health expenses. These resources clarify that food or beverages purchased for health reasons, such as weight loss, can only be reimbursed if they do not fulfill normal nutritional needs, are used to alleviate or treat an illness, and are substantiated by a physician’s prescription.
Understanding the fine line between general wellness and medical care is crucial for taxpayers and plan administrators. As the IRS emphasizes, only expenses that meet the stringent criteria set forth in the Code will be considered for deductions and reimbursements, ensuring the integrity of health-related financial plans.
LEAWOOD, Kansas – NueSynergy, Inc., one of the nation’s fastest growing employee benefits and billing administrators in the country, is pleased to announce its preferred partnership with Broker Builder Solutions (BBS), a national leader in support services for the benefits and technology industry.
“NueSynergy is an industry partner that reflects our shared commitment to solution-oriented strategies for benefits brokers and Human Resource professionals within the employee benefits sector,” said Tonya Taylor, Marketing Leader and Client Relationship Liaison at BBS. This alliance leverages both teams’ expertise to educate clients and effectively provide solutions to their benefits administration and technology challenges. Our shared foundation of outgoing and professional staff is crucial in delivering excellence to the industry and the companies we serve. Through this collaboration, BBS looks forward to expanding our network of trusted benefits professionals.”
NueSynergy continues to achieve exceptional business results with innovative products like its SpouseSaver Incentive Account and COBRAcare+ administration. NueSynergy will work with BBS to offer agents and agencies a wide variety of administrative services for their new and existing employer clients.
“After investing heavily in technology and expansion of our overall infrastructure, NueSynergy has concentrated on partnering with well-known benefits leaders as we continue to expand our nationwide presence,” said Josh Collins, President of NueSynergy. “As we continue to focus on industry-leading service and expanding administration solutions for employers, we have found Broker Builder Solutions to be a natural fit in helping us build new broker and client relationships.”
About NueSynergy NueSynergy is known for industry-leading service, innovative technology, and excellence in providing full-service administration of consumer-driven and traditional account-based plans to employers of all sizes and sectors. Headquartered in Leawood, Kansas, NueSynergy also has locations in Arizona, Florida, Idaho, North Carolina, Pennsylvania, Virginia, Washington, and Rzeszów, Poland.
NueSynergy offers a fully integrated suite of administration services, which include Health Savings Account (HSA), Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA), Lifestyle Savings Account (LSA), and COBRAcare+ administration as well as SpouseSaver Incentive Account, Combined Billing, Direct Billing, and Specialty Solutions. For more information, visit www.NueSynergy.com.
About Broker Builder Solutions Broker Builder Solutions is dedicated to assisting organizations with their benefits administration needs. Whether setting up a new benefits administration platform or maintaining/leveraging an existing platform, BBS can help. With over 15 years of benefit administration experience, the BBS team are experts in leveraging Ben Admin platforms to provide seamless implementations and carrier file transmissions. But their most important win is fostering positive and long-lasting relationships with all organizations across the benefits industry ecosystem.
BBS has expertise in Client Implementation, 834 EDI File Implementation, Carrier and Payroll Integrations, Eligibility Maintenance Support, ACA Reporting, and Data Migration support for cross platform transitions. For more information, visit www.brokerbuildersolutions.com.
QUESTION: We are planning to add an HDHP and to make company contributions to employees’ HSAs. We have been told that an HSA contribution program—unlike the HDHP coverage—would not be subject to ERISA. Is that always true, or are there circumstances in which ERISA might apply?
ANSWER: Employer-facilitated HSA contribution programs generally are not subject to ERISA. Even though HSA funds may be intended to provide medical care, HSAs are viewed as personal accounts that are not ERISA-covered welfare benefit plans, so long as employee participation is completely voluntary and the employer’s involvement is limited. However, there are ways in which an HSA contribution program could become subject to ERISA. Those ERISA triggers should be avoided because ERISA’s compliance obligations were not crafted with HSAs in mind, and it is not clear how and whether all of ERISA’s requirements could be satisfied by an HSA program.
The DOL has established two safe harbors from ERISA coverage that may apply to workplace HSA programs. One, the voluntary plan safe harbor for group or group-type insurance programs, does not allow employer contributions, so for your purposes, we will focus instead on the HSA-specific safe harbor, which allows employer contributions. Under that safe harbor, employer contributions will not result in ERISA’s application if all of the following requirements are met:
Voluntary Employee Contributions. An employer using the safe harbor can unilaterally establish HSAs for employees and deposit employer funds into those accounts. But any contributions made by employees, including salary reduction contributions, must be voluntary.
Portable Funds. An employer’s program may limit forwarding of HSA contributions to a single HSA provider without triggering ERISA. But the employer cannot limit what happens after that initial deposit; employees must be able to move funds to another HSA if they desire.
Unrestricted Use of Funds. Some employers may wish to impose conditions on how HSA funds are used, such as a requirement that funds be used only for qualified medical expenses. Any such restrictions, however, will cause the arrangement to fall outside the safe harbor.
No Employer Influence. When selecting an HSA provider, employers may choose trustees or custodians that offer only a limited selection of investment options or options replicating those available under the employer’s 401(k) plan. Generally, however, the employer cannot make or attempt to influence employees’ investment decisions.
Not Represented as an ERISA Plan. This requirement seems simple, but it is also easily violated. Participant communications must not represent the HSA program as part of an ERISA plan, or as an ERISA plan of its own, and should include appropriate disclaimers indicating that the HSA is not part of an ERISA plan. From a drafting perspective, the HSA provisions should not be included in an ERISA plan document. While bundling non-ERISA and ERISA benefits will normally not make the non-ERISA benefits subject to ERISA, careful drafting and communications are required to ensure that the HSA satisfies the safe harbor.
No Employer Compensation. The employer cannot receive any direct or indirect payment or compensation in connection with its employees’ HSAs. This rule precludes discounts on other products that the employer may purchase from the HSA vendor, and may raise questions in other situations (e.g., bundled arrangements). This prohibition does not preclude making HSA contributions through a cafeteria plan; the employment tax savings realized by the employer is not considered compensation for this purpose.
Failure to meet any one of these elements will cause the program to fall outside the safe harbor. Although a program involving employer actions or program rules not specifically authorized by the safe harbor might still avoid ERISA, any variations should be discussed in advance with counsel.
