The Mid-Atlantic Area Employee Benefits Conference, held May 13-14, 2003 in Philadelphia, PA., provided some very good information to practitioners regarding hot issues in the benefits area. Harry Beker, Esq., of the Office of Chief Counsel, Internal Revenue Service and…
The Mid-Atlantic Area Employee Benefits Conference, held May 13-14, 2003 in Philadelphia, PA., provided some very good information to practitioners regarding hot issues in the benefits area. Harry Beker, Esq., of the Office of Chief Counsel, Internal Revenue Service and Kevin Knopf, Esq., of the U.S. Department of Treasury, spoke on flexible spending accounts (“FSAs”) and health reimbursement arrangements (“HRAs”). Mr. Beker discussed new Revenue Ruling 2003-43 which was released last week, but will be published soon in the Federal Register. The Revenue Ruling provides guidance to those plan sponsors wishing to use debit or credit cards in connection with their FSAs or HRAs.
Under a traditional FSA or HRA, the employee incurs medical expenses and then seeks reimbursement under the Plan for the medical expenses incurred. The IRS has required that before medical expenses could be reimbursed, the employee must submit a claim form along with a receipt or other documentation that “provides a written statement from an independent third party stating that the medical expense has been incurred and the amount of such expense.” Q&A-7(b)(5) of Section 1.125-2 of the Proposed Regulations. The participant is also required to provide a written statement that the medical expense has not been reimbursed or is not reimbursable under any other health plan coverage. Q&A-7(b)(5). This is referred to by the IRS and under the reg.’s as “substantiation” of the medical expense.
Now under Rev. Rul. 2003-43, this substantiation process is fulfilled with the mere “swipe” of the card, said Mr. Beker, as long as the employer adopts procedures which meet the requirements of the Revenue Ruling (discussed below), for the following types of expenses : (1) Co-payments, if the dollar amount of the transaction at a health care provider equals the dollar amount of the copayment for that service under the major medical plan of the specific employee-cardholder; (2) Recurring expenses that match expenses previously approved as to amount, provider and time period (e.g. for an employee who refills a prescription drug on a regular basis at the same provider for the same amount) or (3) if the merchant, service provider, or other independent third-party at the time and point of sale provides information to verify to the employer (through such means as email, the internet, intranet, or telephone) that the charge is for a medical expense. Mr. Beker stated that in order to qualify for the recurring expense method of substantiation (#2 above), the very first payment of the recurring expense would have to be substantiated under normal methods of substantiation either before or after the expense is incurred.
The procedures that must be adopted by the employer in connection with the electronic reimbursement of medical expenses, that are said by the Revenue Ruling to satisfy the requirements of Section 105(b) of the Internal Revenue Code, are as follows: (1) the procedures must require a participant to certify upon enrollment and a reaffirm upon each use of the card, as printed on the back of the card, that the card will only be used for eligible medical care expenses; (2) the procedures must provide that use of the card is limited to certain vendors having health care related Merchant Codes; (3) the procedures must provide that every claim will be reviewed and substantiated, either automatically without additional documentation or annually through the submission of merchant or service provider receipts; and (4) the procedures must include meaningful correction procedures for claims that are subsequently identified as impermissible.
Mr. Beker confirmed what is stated in the ruling that sampling techniques are not permissible for substantiating medical expenses. For vendors who are presently using these techniques, the IRS has given a grace period until the end of this year to conform to the ruling. It was also stated that the IRS has not entirely closed the door on sampling and that the IRS is inviting comments on other methods which the IRS might want to consider.
Mr. Beker mentioned that the one area which seems to have generated concern with respect to the ruling is the IRS Form 1099 requirement for payments made to medical service providers through the use of debit, credit, and stored-value cards under Section 6041 of the Code. (An article here at BenefitsNews.com discussing this concern.) Section 6041 provides for information reporting by persons engaged in a trade or business who make payments of fixed or determinable income to another person in the course of such trade or business of $600 or more in a taxable year.
The question was asked as to whether or not dependant care and Section 132 expenses could be paid through the same type of credit card or debit card arrangements. Mr. Beker replied that the ruling does not address these types of expenses and therefore does not offer any guidance with respect to dependant care or Section 132 expenses. He did state that the problem with the use of credit/debit cards for dependant care is that the card could only be used for expenses already incurred, and not for expenses to be incurred in the future.