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Posted April 1, 2021

FSA substantiation requirements

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The IRS requires your flexible spending account (FSA) participants to submit documentation to show their purchase was an eligible expense. It’s important to have an FSA administrator that offers innovative solutions that simplify the substantiation process. See why IRS substantiation guidelines are important and what you and your participants can do to stay in compliance.

Why is substantiation required?

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

FSAs are a great way for employers and employees to save. When employees participate in an FSA, employers save on FICA taxes since their participation reduces their taxable wages. And they save because the funds they contribute and their reimbursements for eligible expenses 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 with the substantiation requirements, your FSA could become disqualified. In some circumstances, the IRS could treat all medical FSA reimbursements, including those that were properly substantiated, as taxable wages and subject to FICA and FUTA taxes.

What does the IRS require for FSA substantiation?

To reduce your risk as an employer 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, participants with an FSA powered by WEX have access to technology, processes, and educational materials to make it easier for them to access their funds. 

Our 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, participants with a WEX benefits debit card see 85 percent of their debit card purchases automatically approved without additional documentation. And in the remaining instances when more documentation is needed, our participants can easily upload it via the benefits mobile app or through their online accounts.

Would you like to learn more about the FSA experience with us? Check out our FSA page

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