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FSA Debit Card Substantiation Rules

On Behalf of | Aug 11, 2021 |

The IRS has released Information Letter 2021-0013 to reconfirm the substantiation rules for debit card use in health care flexible spending account plans (“FSAs”).

Law. Health care FSAs may issue flexible spending debit cards to each participant who enrolls in the FSA. Generally, a participant may, but is not required to, use this flexible spending debit card at authorized locations to pay health care expenses up to the participant’s health care FSA account limit.

A participant may be required to be submit a written claim for FSA benefits in such time and manner as required by the plan administrator to substantiate the expenses.  These claims typically include bills, invoices, receipts, canceled checks or other evidence to show the amount of such expenses, together with any additional forms of documentation the plan administrator may request.

Information Letter 2021-0013. The IRS first notes that heath care expenses paid or reimbursed from a health FSA are excludable from gross income.

The IRS next explains that an independent third party must substantiate medical expenses paid or reimbursed from a health FSA. Substantiation for health care expenses includes:

  • information describing the service or product;
  • the date of service or sale; and
  • the amount of the expense.

The IRS also notes that there are special rules for medical expenses reimbursed with a debit card. These rules take into account the information that a debit card transaction provides. Some debit card transactions require more information to substantiate that the expense is a health care expense. For example, a debit card transaction may provide the amount of the transaction, a general category for the service merchant, and the specific service provider. However, it may not show the specific items or services provided in the transaction. If the debit card transaction does not satisfy the substantiation requirements, the plan administrator must request more information to substantiate the medical expense.

An independent third party must provide a statement verifying the medical expense, either automatically or after the transaction. If, at the time and point of sale, an independent third party provides information to verify that the charge is for a health care expense, then that expense is substantiated without the need for further review.

In addition, the health FSA sponsor may coordinate with an individual’s insurance provider to use information provided in an explanation of benefits to substantiate a debit card charge without requiring more information. Under the debit card rules, payment of recurring expenses for health care expenses incurred at certain providers that match the amount, medical care provider, and time period of previously approved expenses can be approved without additional substantiation.  Finally, the IRS notes that the FSA may impose stricter standards than those described above to ensure that the health FSA is used only to pay or reimburse medical expenses.

The IRS Information Letter is available at: 21-0013.pdf (