IRS Information Letter Addresses Substantiation Requirements for Debit Card Programs

Earlier this year, the IRS released an information letter addressing the substantiation rules for health Flexible Spending Arrangement (FSA) debit card programs. The letter responds to an inquiry from a health FSA participant whose card was declined at a medical facility that didn't have an "IRS qualified" merchant category code (MCC). The participant asked why the IRS didn't recognize the facility as qualified to receive card payments.

MCCs Are Key

The letter explains that health FSAs and other employer-sponsored health plans with debit card programs must comply with IRS rules that generally limit card use to physicians, dentists, vision care offices, hospitals or other medical care providers, as identified by an MCC.

MCCs aren't assigned by the IRS, however. They're determined by the provider and card issuer. The letter suggests that the participant ask the plan about other methods for obtaining reimbursement of medical expenses, such as by submitting a reimbursement claim accompanied by third-party information to substantiate the claim.

The letter doesn't break new ground or include any surprises. But, like other recent IRS information letters, it may be helpful to those on the "front lines" of cafeteria plan administration who are sometimes asked to explain the reasons for plan operating rules and decisions.

Although not mentioned in the letter, the debit card program rules allow card transactions at merchants without a medical care provider MCC if an inventory information approval system (IIAS) is in place to ensure that cards are used only for eligible medical care expenses. Certain recordkeeping requirements also must be met. Thus, medical care providers that don't have a medical care provider MCC could use an IIAS for card transactions.

Details Matter

Tax-advantaged financial accounts such as health FSAs have become increasingly popular. And debit cards are a natural fit in today's often cashless marketplace. If your organization offers such a plan, work with your benefits advisors to manage the details.

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