IRS Chief Counsel Memorandum 202317020 (Mar. 29, 2023)

Obtainable at https://www.irs.gov/pub/irs-wd/202317020.pdf

The IRS Chief Counsel’s workplace has launched a memorandum that addresses the substantiation necessities for medical and dependent care bills and the implications of assorted substantiation shortcuts. The memo reconfirms that medical expense reimbursements from a well being FSA are included in an worker’s gross revenue if the well being FSA fails to completely substantiate any expense of any worker in accordance with IRS guidelines (see our Checkpoint article). Moreover, cafeteria plans that don’t require an impartial third celebration to completely substantiate all medical expense reimbursements (e.g., by allowing worker self-certification or by substantiating just some bills (sampling) or not substantiating bills under a “de minimis” greenback quantity or from “favored suppliers”) or don’t require substantiation of all DCAP reimbursement claims fail to function in accordance with these guidelines and won’t qualify as cafeteria plans beneath the Code, leading to gross revenue to staff. The memo additionally reconfirms that dependent care expense reimbursements can’t be excluded from an worker’s gross revenue if any such bills of any worker should not substantiated after the expense is incurred.

The memo addresses six conditions. Within the first, a cafeteria plan employs conventional substantiation strategies beneath its well being FSA, solely reimbursing eligible medical bills which can be substantiated by info from an impartial third celebration (i.e., a celebration impartial of the worker and the worker’s partner and dependents) that describes the service or product, the date of service or sale, and the quantity of the expense. The plan additionally makes reimbursements utilizing “EOB rollover” procedures that adjust to IRS guidelines, requires staff to certify that bills haven’t been reimbursed by insurance coverage or in any other case and that they won’t search reimbursement from every other plan overlaying well being advantages, and gives a debit card program that complies with IRS guidelines. [EBIA Comment: It is interesting to note that the IRS has reiterated that the individual will not “seek reimbursement” from another plan rather than requiring that there be no other source of reimbursement.] On this state of affairs, the memo explains, all claims are substantiated in accordance with relevant Code and IRS necessities.

4 conditions contain plans with totally different practices: permitting worker self-certifications (as a substitute of impartial third-party statements); not requiring an impartial third-party assertion for debit card prices that aren’t auto-substantiated; or utilizing sampling, de minimis, or favored supplier approaches for debit card prices. In accordance with the memo, as a result of reimbursements should not restricted to bills which can be substantiated, the plans don’t fulfill relevant substantiation necessities and all reimbursements made throughout the yr—together with reimbursements of substantiated bills—are included in staff’ gross revenue. Within the remaining state of affairs, the plan routinely reimburses DCAP contributors every pay interval for a professional rata portion of their attested annual dependent care bills. Reimbursements should not restricted to bills which were incurred or substantiated, so the plan doesn’t fulfill relevant substantiation necessities and all funds made throughout the yr are included in staff’ gross revenue. The memo additionally notes that cafeteria plans in these 5 conditions fail to function in accordance with their written plans and the cafeteria plan guidelines.

EBIA Remark: The IRS’s newest reminder of the substantiation necessities for well being FSAs and DCAPs doesn’t break any new floor—the principles have been in place for a few years and the prohibition on substantiation shortcuts is well-known (for instance, see our Checkpoint article and our Checkpoint Query of the Week). However, it serves as a useful evaluation of the principles, whereas additionally underscoring the potential issues with some present preparations and making it much more tough for plans that aren’t in compliance to say they “didn’t get the memo.” We discover it fascinating that the memo is directed to the employment tax coverage division, maybe signaling route for audit exercise. Employers and plan service suppliers might need to take this chance to test their expense evaluation and approval practices to make sure compliance with relevant guidelines. For extra info, see EBIA’s Cafeteria Plans guide at Sections XX.J (“Well being FSAs: Ample Claims Substantiation Should Be Obtained From the Participant and an Unbiased Third Occasion”), XXI.G (“Digital Cost Card Packages for Well being FSAs”), and XXIV.M (“DCAPs: Ample Claims Substantiation Should Be Obtained”).

Contributing Editors: Due to lawyer John R. Hickman for his contributions to this text, with ultimate enhancing by EBIA workers. Mr. Hickman is a associate within the Worker Advantages Follow Group with Alston & Hen in Atlanta, www.alston.com, and is a Contributing Writer of EBIA’s Cafeteria Plans, Client-Pushed Well being Care, and Well being Care Reform manuals.