Healthcare Debit Cards

What every employer should know about electronic payment card claims processing…

What every employer should know about electronic payment card claims processing…

Employer/plan sponsors who allow reimbursement plan (e.g. Health FSA, and/or HRA) participants to pay for eligible expenses with an electronic payment card at the point of service are faced with a fundamental question—what are the substantiation requirements associated with electronic payment card payments? Current trends in the industry have made this a difficult question to answer. The applicable Internal Revenue Code (“Code”) sections, regulations and other guidance applicable to health and dependent care reimbursement arrangements mandate that each and every request for reimbursement under the applicable plan be adjudicated by a third party and supported by appropriate substantiation. The IRS has also issued clear guidance that each and every electronic payment card (“Card”) payment must be adjudicated and properly substantiated and that only those transactions that fit squarely into very limited “auto adjudication” categories need no additional paper substantiation because they are self-substantiating by their very nature. Despite the clear language in the applicable guidance, the benefits community continues to allow participants to self-certify the eligibility of Card transactions that fall outside the scope of the Auto Adjudication categories set forth in the applicable guidance. Many in the benefits community argue that the applicable guidance establishes a mere safe harbor and that other approaches not set forth in the guidance or that the other restrictions placed on the use of Cards (e.g. use only merchants with a health care related merchant category code) effectively preclude the use of such Cards for anything other than eligible medical expenses—thus, no substantiation is required. From a business viewpoint, these types of administrative policies are attractive for plan sponsors because the claims processing is easier for everyone involved, which results in lower administrative costs for the employer/plan sponsor and fewer complaints from the participants.

Despite the attractiveness of such administrative policies, the applicable guidance is very clear that only those specific adjudication and substantiation approaches identified in the guidance are permissible and that guidance requires after the fact adjudication/substantiation in every instance except in certain very narrow and limited situations strictly defined by the guidance. The failure to properly adjudicate and substantiate reimbursements under a reimbursement plan in accordance with the guidance can result in rather severe tax consequences for both the participants and the employer/plan sponsor. For example, failure to require appropriate substantiation can result in disqualification of the reimbursement plan, which will result in all reimbursements under the plan, even those for otherwise eligible expenses, being included in the participant’s income and subject to withholding by the employer/plan sponsor.

To view the IRS guidelines of debit card substantiation rules, you can click here.

To speak to an OCA Regional Sales Manager, click here