Have you received notice from the third-party administrator (TPA) for your Flexible Health Spending Account (health FSA) that you have unresolved transactions that need your attention? If you get one of these letters, action is necessary. And while your TPA may provide some high-level information regarding the actions you can take to address the unresolved transactions, there is more to it than that.
There has not been any new guidance issued, yet we have seen an increase in TPAs following up on unresolved transactions stemming from the use of electronic payment cards. TPAs like electronic payment cards because it helps streamline health FSA administration and participants like them because they avoid cash flow hardships by automatically paying the service provider for eligible medical expenses at the point-of-sale. While the IRS allows auto-adjudication (meaning no additional substantiation is needed) for certain card transactions at some merchants and service providers, most transactions do require additional substantiation. The IRS has made it clear that if a plan does not require all claims to be substantiated, all payments made during the year, including those for medical expenses, need to be included in the participants’ gross income. That essentially negates the whole purpose of a health FSA: to use pre-tax dollars for eligible medical expenses.
Employers, as plan sponsors, are ultimately responsible for the operation of their plan, and need to understand the IRS rules on claims paid with electronic payment cards, including the steps that must be followed to recoup money for claims improperly paid from the health FSA (e.g., eligible medical expense claims for which the participant failed to provide required documentation).
It may help to think about the claims paid with an electronic payment card that are not auto-adjudicated as conditional payments pending after-the-fact confirmation that they were for eligible medical expenses. The IRS laid out correction procedures, referred to as “pay-and-chase,” that must be followed to recoup money from participants if that after-the-fact confirmation is not subsequently provided. The IRS rules include the 5 steps outlined below. Step 1 should always be the first step. Steps 2 through 4 can be done in any order, and may be done simultaneously. Your TPA should have a process in place to take care of steps 1, 2 and 4, in a way that ensures participants are treated in a consistent manner.
If you are notified by your TPA that you have unresolved transactions, that is your TPA telling you that as the employer and plan sponsor, you need to take the final steps. Step 5 must be taken last, but before you proceed, you do need to ensure that steps 1-4 have been completed. That likely means evaluating whether step 3 is allowed by state law, and whether it is feasible. If the participant does not have additional compensation from which you can withhold and/or state law does not permit you to withhold from pay, you move on to Step 5.
While informal agency comments have suggested that some of the correction steps can be applied across plan years, there is a 2014 Chief Counsel Advice memorandum that states that steps 2 through 4 should be taken during the plan year in which the improper payment was made. In cases where that did not happen, the employer should proceed to step 5.
It is not uncommon to find that the employee is no longer with your organization when you reach the point of forgiving the debt. That does not relieve you from having to report the amount as wages. You may need to consult with your payroll provider or tax professional for guidance on how to properly report the improper payment as wages for a former employee.
LouAnne's specialty is managing special projects designed to assist clients with their benefit-related compliance responsibilities. LouAnne monitors the legislative and legal environments and the state and federal mandates that impact our clients.
LouAnne's specialty is managing special projects designed to assist clients with their benefit-related compliance responsibilities. LouAnne monitors the legislative and legal environments and the state and federal mandates that impact our clients. She is the former chairwoman of the Compliance Committee for Benefit Advisors Network, where she frequently served as a panelist on issues involving healthcare reform. LouAnne is also a frequently sought-after panelist (for the MN State Bar Association, Business Journal and other organizations) to lend her expertise on healthcare reform and the HR perspective. LouAnne has a Bachelor’s of Arts degree from the University of Minnesota, Minneapolis and a Masters in Human Resources from the University of St. Thomas, St. Paul.
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