Understanding IRS Rules: The Importance of Substantiating Health FSA and DCAP Claims

Understanding IRS Rules: The Importance of Substantiating Health FSA and DCAP Claims

Introduction

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.

Source: Thomson Reuters

Understanding IRS Rules: The Importance of Substantiating Health FSA and DCAP Claims

Understanding DCAP Reimbursement Rules: Can You Pay Your Child for After-School Care?

Can Our DCAP Reimburse Expenses for the Care of a Child Who Will Turn 13 Later in the Plan Year?

A participant in our company’s Dependent Care Assistance Program (DCAP) faces a common scenario: hiring an adult son to provide after-school care for their 10-year-old daughter. The burning question: Can the DCAP reimburse payments to the son? Let’s dive into the details.

  1. Eligibility for Reimbursement:
    • Payments to certain relatives or dependents do not qualify for reimbursement under the DCAP requirements.
    • Specifically, a DCAP cannot reimburse payments to an employee’s child who is under age 19 at the end of the year or to someone whom the employee (or the employee’s spouse) could claim as a dependent.
    • Whether the DCAP can reimburse the participant for care provided by the son hinges on the son’s age and whether the participant (or the participant’s spouse) can claim him as a dependent for federal income tax purposes.
  2. Limitations on Reimbursement:
    • DCAPs cannot reimburse payments to an employee’s spouse or to the parent of an under-age-13 qualifying child (e.g., an employee’s former spouse who is also the child’s parent).
    • It’s essential to communicate this information clearly in your DCAP summary or open enrollment materials.
  3. Documentation Requirements:
    • Participants must include specific details when claiming an exclusion for reimbursement of dependent care expenses on their tax returns (using Form 2441).
    • For individual care providers, participants need to provide the name, address, and taxpayer identification number (TIN) (usually the Social Security number).
    • Exempt organizations require only the provider’s name and address.

In summary, while the DCAP can potentially reimburse payments for care provided by the son, it’s crucial to understand the eligibility criteria, limitations, and documentation requirements. Clear communication and accurate reporting are key to ensuring compliance with DCAP rules.

Source: Thomson Reuters

Understanding IRS Rules: The Importance of Substantiating Health FSA and DCAP Claims

IRS Announces 2024 Standard Mileage Rates and Maximum Vehicle Values

The IRS has announced the optional 2024 standard mileage rates for business, medical, and other uses of an automobile, and the 2024 vehicle values that limit the application of certain rules for valuing an automobile’s use. For 2024, the business standard mileage rate is 67 cents per mile (up from the 65.5-cent rate that applied during 2023). The rate when an automobile is used to obtain medical care—which may be deductible if it is primarily for, and essential to, the medical care—is 21 cents per mile for 2024 (down from the 22-cent rate that was in effect during 2023). The same 21-cent rate will apply for deducting automobile expenses that are moving expenses. For taxable years beginning after 2018 and before 2026, however, the moving expense deduction is available only for certain moves by members of the Armed Forces on active duty (see our article). The 2024 rate for charitable use of an automobile is 14 cents per mile (unchanged from 2023).

Standard mileage rates can be used instead of calculating the actual expenses that are deductible. For example, the business standard mileage rate can be used instead of determining the amount of fixed expenses (e.g., depreciation, lease payments, and license and registration fees) and variable expenses (e.g., gas and oil) that are deductible as business expenses. Only variable expenses are deductible as medical or moving expenses, so the medical and moving rate is lower. Parking fees and tolls related to use of an automobile for medical or moving expense purposes may be deductible as separate items. Fixed costs (e.g., depreciation, lease payments, insurance, and license and registration fees) are not deductible for these purposes and are not reflected in the standard mileage rate for medical care and moving expenses. These and other details about using the standard mileage rate can be found in Revenue Procedure 2019-46.

The Notice also sets the maximum vehicle values that determine whether the cents-per-mile rule or the fleet-average valuation rule are available to value the personal use of an employer-provided vehicle. The cents-per-mile rule determines the value of personal use by multiplying the business standard mileage rate by the number of miles driven for personal purposes. The fleet-average rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule. For vehicles (including vans and trucks) first made available to employees for personal use in calendar year 2024, the maximum vehicle value under both rules will increase to $62,000 (up from $60,800 in 2023). That amount will also be the maximum standard automobile cost for setting reimbursement allowances under a fixed and variable rate (FAVR) plan—an alternative to the business standard mileage rate that bases payments on data derived from the geographic area where an employee generally pays or incurs the costs of driving an automobile in performing services as an employee.

Source: Thomson Reuters

IRS FAQs Explain When Health FSAs, HSAs, or HRAs Can Reimburse Nutrition, Wellness, and General Health Expenses

IRS FAQs Explain When Health FSAs, HSAs, or HRAs Can Reimburse Nutrition, Wellness, and General Health Expenses

The IRS has issued FAQs that explain when certain costs related to nutrition, wellness, and general health are medical expenses under Code § 213 that may be paid or reimbursed under a health FSA, HSA, or HRA. As background, Code § 213 defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. The FAQs explain that medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness, and do not include expenses that are merely beneficial to general health. 

The FAQs confirm that the costs of dental, eye, and physical exams are medical expenses that can be paid or reimbursed by a health FSA, HSA, or HRA because these exams diagnose whether a disease or illness is present. The costs of smoking cessation programs and programs that treat drug-related substance use or alcohol use disorders are also medical expenses because they treat a disease. For the cost of therapy to be a medical expense, the therapy must treat a disease—thus, amounts paid for therapy to treat a diagnosed mental illness are medical expenses, while amounts paid for marital counseling are not. Likewise, the costs of nutritional counseling and weight-loss programs are medical expenses only if the counseling or program treats a specific disease diagnosed by a physician (e.g., obesity or diabetes); otherwise, these costs are not medical expenses. The cost of a gym membership is a medical expense only if the membership was purchased for the sole purpose of affecting a structure or function of the body (e.g., a prescribed plan for physical therapy to treat an injury) or treating a specific disease diagnosed by a physician (e.g., obesity or heart disease). However, the cost of exercise for the improvement of general health is not a medical expense, even if recommended by a doctor. 

The FAQs also explain the circumstances under which the cost of food or beverages purchased for weight loss or other health reasons will qualify as medical expenses, and that the cost of non-prescription drugs can be paid or reimbursed by a health FSA, HSA, or HRA even though these items (except for insulin) are not deductible under Code § 213. The FAQs confirm that the cost of nutritional supplements is not a medical expense unless the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. 

Source: Thomson Reuters 

IRS FAQs Explain When Health FSAs, HSAs, or HRAs Can Reimburse Nutrition, Wellness, and General Health Expenses

Can an Adult Child’s Medical Expenses Be Reimbursed Tax-Free From a Parent’s HSA?

QUESTION: Our company sponsors a high-deductible health plan (HDHP) in conjunction with employee HSAs. Can the medical expenses of our employees’ adult children who otherwise qualify for tax-free coverage under the HDHP be reimbursed tax-free from the employees’ HSAs? 

ANSWER: Not necessarily—it depends on whether the adult children qualify as tax dependents under the HSA rules. As group health plans, HDHPs that provide dependent coverage of children must make the coverage available until a child turns age 26. (The age 26 mandate does not generally apply to HSAs because they are not group health plans.) The income exclusion for employer-provided health coverage includes employees’ children who are under age 27 as of the end of the taxable year, regardless of whether those children qualify as tax dependents. But similar provisions do not appear in the HSA tax-free reimbursement rules. Instead, whether an adult child’s medical expenses can be reimbursed tax-free from a parent’s HSA depends on whether the child qualifies as a tax dependent for HSA distribution purposes—i.e., whether the adult child is a qualifying child (for example, due to disability) or a qualifying relative (where the parent provides over one-half of the child’s support). Distributions from a parent’s HSA that reimburse a nondependent adult child’s medical expenses are taxable and may be subject to an additional 20% tax. 

Thus, the medical expenses of some adult children who are enrolled as dependents in your company’s HDHP will not qualify for tax-free reimbursement from the employee-parent’s HSA. It is possible, however, that these children may be HSA-eligible themselves. If they cannot be claimed as tax dependents and they meet the other HSA eligibility requirements, they could open HSAs of their own. 

Source: Thomson Reuters

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