Cafeteria Plan Check-In: Claims Substantiation

A recent memorandum from the IRS Office of Chief Counsel serves as a helpful reminder to check in on cafeteria plan administration and ensure all processes—including claims substantiation for medical expenses and dependent care expenses—meet minimum standards under Code Section 125. Failure to correctly administer your cafeteria plan can result in unwanted tax consequences.

Code Section 125, and the proposed regulations thereunder, require that any and all reimbursements requested by a cafeteria plan participant be fully substantiated. This means that cafeteria plans should have processes in place to ensure that independent third parties fully substantiate all medical expense reimbursements and all dependent care assistance expenses. A lack of such processes can result in participants losing favorable tax benefits—meaning that amounts elected under the plan may be included in gross income and subject to withholding.