IRS Changes FSA Card World

For employers that sponsor flexible spending accounts,electronic payment cards, commonly referred to as FSA debit cards,are nothing new. But the way plans must administer debit cardprograms is now very different.

On May 10, 2003, the Internal Revenue Service issued guidance,Revenue Ruling 2003-43, which explains how to use a stored valuecard or credit card to pay for medical expenses through a healthflexible spending account or health reimbursement arrangement.

The result is that the world of FSA cards is changing.

This article can give only a brief summary of the revenueruling. Advisors and executives who want to make use of the rulingshould consult their legal advisors. But an initial reading of theruling shows that each permissible arrangement must include thefollowing elements:

o Each plan year, the participant must certify that the cardwill be used only for eligible medical expenses as defined byInternal Revenue Code Section 213(d).

o The participant must certify that any expenses paid with thecard have not been and will not be reimbursed from any othersource.

o The special certification should be referenced on the carditself and is to be reaffirmed each time the card is used.

o The employer must employ merchant codes to restrict card usageto medical providers only.

o If an expense is later identified as not eligible, the paymentmust be reversed by one or more correction methods. The methods arewithholding from pay, withholding reimbursement of subsequenteligible expenses against the ineligible balance, and treating theineligible payment as a debt owed to the employer.

o Participants must retain documentation supporting the expensespaid by the card.

Fortunately, the IRS ruling of May 10 describes 3 types of cardtransactions that, when combined with the elements described above,meet the requirements of “adequate substantiation” for FSA expensesdefined by Treasury regulations.

No additional documentation need be submitted if any of thefollowing expenses are processed through an otherwise valid cardarrangement:

(a) Expenses that equal the dollar amount of the participant'smedical plan co-pay amounts.

(b) Recurring expenses that match previously approvedamounts.

(c) Expenses that are verified by an independent third party atthe point of sale (i.e., real-time matching of the expense againsta database of eligible expenses).

But, if a card arrangement does not take advantage of one ormore of the automatic substantiation provisions mentioned above,then 100% of those claims must be substantiated manually (typicallyvia paper) after the payment is made.

Many employers that relied on statistical sampling methods havebeen seeking help from FSA outsourcing specialists.

Brian Connelly is a product manager for reimbursement accountservices at Ceridian Corp., Minneapolis, a provider of managedhuman resource solutions.

Reproduced from National Underwriter Edition, April 19, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.