Health FSA Debit Card Substantiation Rules
A benefits debit card is convenient, but every swipe still has to be shown to be a medical expense. IRS guidance allows certain automatic substantiation methods and requires follow-up for the rest. Here is what employers should know.
How The Card Is Supposed To Work
Health Care Merchants Only
The card is limited to merchants and providers with health care related merchant category codes, such as physicians, pharmacies, dentists, vision care offices and hospitals. The restriction is enforced through the card network at the point of sale, so a purchase at an unrelated merchant is usually declined. Employees should know that some stores sell both eligible and ineligible items, and the card works differently there.
Employee Certification
The employee certifies when enrolling, and each plan year, that the card will be used only for eligible medical expenses of the employee and dependents, and that expenses have not been reimbursed elsewhere. Employers typically collect this certification in the enrollment materials, and a signed or electronic record should be kept. A clear reminder of what is eligible helps employees avoid misuse that later has to be corrected.
Limited To The Election
Use of the card is limited to the coverage available in the health FSA or HRA, and the card is cancelled when employment ends. Employees who leave should be told their card stops working so they do not try to use it after their last day. Employers should coordinate the cancellation with the administrator, and explain any run-out period for claims.
Charges That Can Be Substantiated Automatically
Copayment Match
If the charge at a health care provider matches the copayment for that service under the employee’s medical plan, it can be treated as substantiated. IRS Notice 2006-69 extended this to exact multiples of a copayment, up to five times.
Recurring Expenses
A charge that matches a previously approved expense for the same amount, provider and time period, such as a regular prescription refill, can be treated as substantiated. The recurring match depends on the expense being identical, so a change in dose, amount or provider generally goes back through normal review. The administrator can explain how its system recognizes repeat charges.
Real-Time Substantiation
If the merchant or an independent third party, such as a pharmacy benefit manager, verifies at the point of sale that the charge is a medical expense, it can be treated as substantiated. Not every merchant or processor offers this type of verification, so employees may still be asked for documentation. Employers should ask their administrator how many of their card transactions are confirmed automatically.
Inventory Information Approval Systems
Matching Items At Checkout
Under an inventory information approval system, the merchant matches items against a list of eligible medical expenses so qualifying purchases are substantiated at the point of sale. The system depends on the merchant’s technology, and a retailer that does not use it may leave the charge for later review. Employees should keep receipts so they can respond if documentation is requested.
90 Percent Stores
IRS guidance also describes stores where at least 90 percent of gross receipts are for qualifying medical items, with charges treated as conditional until substantiated. The rule does not remove the need to substantiate, and the charge can still be questioned afterward. Employers should ask their administrator whether stores of this type are treated as conditional in their card program.
Ask The Administrator
Whether a given store qualifies is a matter for your FSA administrator and card processor. Confirm how your program handles it. The administrator can explain which merchants are covered and what documentation employees may be asked for. Employers should ask for written guidance they can share, and keep a copy with the plan records.
When A Charge Is Not Substantiated
Treat It As Conditional
Charges that cannot be automatically substantiated need documentation, such as a receipt or explanation of benefits, under the plan’s procedures. Employees should know to keep receipts and the plan’s rules for when to submit them, because the account can be affected if a request goes unanswered. A short reminder in the plan materials helps people respond on time.
Correct The Account
The plan should have a process for resolving unsubstantiated charges, including requesting documentation and correcting the account if the expense is not eligible. Corrections may include repayment, a reduction of another claim or other steps the plan allows, and the process should be applied the same way for everyone. Employers should document each case and its resolution.
Write It Into The Plan Document
The substantiation procedures should appear in the FSA or HRA plan documents and be explained to participants. A written procedure helps staff handle questions in the same way each time and gives employees a place to look. Employers should ask counsel or the administrator to review the wording whenever the card process changes.
Frequently Asked Questions
Does a debit card swipe prove an expense is eligible?
Not by itself. The charge must be substantiated through an approved automatic method or by documentation.
What is a copayment match?
A charge at a health care provider that equals the copayment under the employee’s medical plan, or an exact multiple of it up to five times under IRS Notice 2006-69.
Can the card be used anywhere?
No. It is limited to merchants with health care related merchant category codes, with the retail exceptions IRS guidance describes.
What happens to an unsubstantiated charge?
The plan should follow its procedures to request documentation and correct the account if the expense is ineligible.
Do the rules apply to HRAs?
IRS guidance on debit cards applies to health FSAs and HRAs.
Is this legal advice?
No. This page is general information, not legal or tax advice. Rules change, so confirm current requirements with your attorney or tax advisor.
Send us your renewal.
We’ll tell you whether it looks competitive, where we see opportunity, and the five questions we’d put to your carrier. No cost, and no obligation to move anything.
The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents — two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
Laws and rules referenced
26 U.S.C. § 125 — Cafeteria plans: pre-tax premium payments, plan limits and nondiscrimination rules.
IRS Notice 2013-71 — Health FSA carryover of unused amounts.
IRS Notice 2005-42 — The grace period for cafeteria plan health and dependent care FSAs.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
An independent employee benefits consulting firm. We look at the entire benefits program: cost, plan performance, risk and administration.
Switch to CFH. Unhappy with your broker? Your employees won’t notice. You will. →
Cookies on This Site
We use cookies to keep the site working properly and to understand how it is used. You can decline anything that is not essential. See our Privacy Policy for the detail.
- Essential: needed for the site to load and for you to move around it. These cannot be switched off.
- Analytics: tell us which pages get read, so we know what is worth writing more of.
- Advertising: set by third parties such as ad and social platforms to measure and target campaigns.