IRS Emphasizes Health FSA And Dependent Care Assistance Program Substantiation Requirements

On April 28, 2023, the Internal Revenue Service's (IRS) Office of Chief Counsel released guidance reiterating claims substantiation rules for health flexible spending arrangements (health FSAs) under Internal Revenue Code Section 125 and frowning upon certain substantiation practices that seem to have crept into common usage.

Quick Hits

• All health FSA reimbursements must be fully substantiated using information from an independent third party.
• Practices that do not satisfy the substantiation rules include self-certification, sampling, waiving substantiation of claims from favored providers, and not verifying expenses below a certain dollar threshold.
• Noncompliant plans could be disqualified by the IRS, resulting in adverse tax consequences for the employer and all participating employees.