Why Substantiation Matters and What You Should Look For

July 9, 2019

The IRS requires your Flexible Spending Account (FSA) participants to submit documentation to show their purchase was an eligible expense. That’s why it’s important to have an FSA administrator that offers innovative solutions that simplify the substantiation process.

Unfortunately, not all administrators require participants to submit documentation. Others might accept ineligible documentation, even when it doesn’t include all of the information required by the IRS. Working with an administrator that doesn’t adhere to IRS regulations for FSAs puts you and your employees at risk. See why IRS substantiation guidelines are important and what you and your participants can do to stay in compliance.

FSA documentation requirements

Why is substantiation required?

Because of an FSA’s tax advantages, the IRS requires you and your employees to prove that FSA funds are only being spent on eligible expenses.

FSAs are a great way for you and your employees to save. When your employees participate in an FSA, you save on FICA taxes since their participation reduces their taxable wages. And they save because the funds they contribute are not taxed.

How do substantiation requirements affect you and your employees?

FSAs are employer-sponsored accounts, so it’s particularly important for you to comply with IRS regulations regarding documentation. If the IRS determines your FSA is or was not in compliance, your FSA may be disqualified. Any contributions you and your employees have made to an FSA could be considered taxable when a plan is disqualified.

What can you do to ensure IRS compliance?

To reduce your risk and the potential for future financial headaches, choose a third-party administrator that requires claims to be substantiated. IRS regulations outline what your employees’ documentation should contain. For Medical FSAs, documentation should include:

  • Date service was received or purchase was made
  • Description of service or item purchased
  • Dollar amount
  • Provider or store name

An Explanation of Benefits (EOB) typically contains the information required by the IRS.

How can third-party administrators simplify substantiation?

When you’re choosing your third-party administrator, look for one with a proven track record of making the process of submitting substantiation as easy as possible for your employees.

For example, we’ve developed technology, processes and educational materials to make it easier for participants to access their funds. The Discovery Benefits debit card automatically approves any FSA purchases on eligible expenses when used at merchants with an Inventory Information Approval System (IIAS). That’s why, on average, our participants see 85 percent of their debit card purchases automatically approved without additional documentation. And in the remaining instances when more documentation is needed, participants can easily upload it via the Benefits Mobile App by Discovery Benefits or through their online accounts.

Would you like to learn more about the FSA experience with us? Download our FSA Employee Guide.

Please note: Discovery Benefits cannot provide legal, investment or financial advice related to the plans we administer and nothing shared in this blog post should be interpreted as such. We encourage you to seek appropriate professional advice regarding your plan.

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