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Claim Substantiation for FSA Accounts


Guest Chris Koch
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Guest Chris Koch

As a third party administrator, we currently provide administration for 225 employer groups for their medical and/or dependent care spending FSA accounts. Recently we have lost a couple groups to a competitor TPA, for the reason this TPA does not require any type of receipts to be submitted when a plan participant requests reimbursement from their FSA accounts. Rather they are allowed to go on-line, indicate the amount they are requesting, and the requested reimbursement amount will then be direct deposited into their designated checking/savings account.

We have actually contacted this TPA and they have told us it is up to the plan participant to submit only those claims that are eligible and the ultimate responsibility lies with the plan participant, rather than with the employer and/or the TPA. I disagree since the claims substantiation rules in Section 125 make it very clear that in order for an Employer and/or Administrator to reimburse out of an FSA, the plan participant is not only required to submit a statement saying the expense will or has not been reimbursed by any insurance or other reimbursement program, in addition to a statement from a third party provider.

Any comments from other TPA's?

Chris Koch

Benefit Extras, Inc.

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Chris - it is called a fast buck. TPA is going to argue the PS is responsible for qualification problems. PS is the one who will get "in trouble" for not properly following guidelines. TPA will close up shop and move on to another PS where they will continue to provide services and make money.

JanetM CPA, MBA

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Check the status of the rules. My understanding is that there are many FSA rules that have been issued under proposed regs. which are not binding on an employer. I dont know if there are final regs on claims substantiation. Also there is little risk of audit of 125 plans from the IRS. 125 audits are limited to payroll taxes.

mjb

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Harry Beker of the IRS has gone on record any number of times saying that all claims must be adjudicated. He has stated that there is no minimum dollar amount. In fact, we have in our EBIA Manual, the list that the IRS auditors are supposed to use when auditing a Cafeteria Plan. Proper claims substantiation procedures is on the list. I know that we look at every claim for all of the elements before approving it.

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It appears that the TPA is taking advantage of the lack of final regulations on substantiation in order to provide service at a reduced cost because there are no eyeballs reviewing the claim documents. I am not aware that the IRS has issued final regs on substantiation (1.125-2 A-5(B)(7)), therefore the Service cannot enforce such requirement against an employer regardless of what the audit guidelines state. It is an agressive positure which needs to be evaluated on a risk reward basis. There is also the possibility that the IRS may change the substantiation requirements to permit simplified filing of claims via the internet.

mjb

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While I think that this TPA is doing a disservice to his client and leaving the client and employees at risk, they are really just exploiting the law and ignorance of it.

mbozek points out something that I have always wondered why people in the employee benefits world seem to miss.

Proposed Treasury Regs have "no effect of law" etc. This has been stated by a number of Courts including the US Supreme Court.

Therefore, as mbozek points out, the IRS cannot penalize an employer for not following the Proposed Treas Regs.

At the end of any Proposed Treas Regs is usually the disclaimer that the taxpayer "may" follow the Regs. It is optional not a must.

The IRC, a number of General Counsel Memoranda, Audit Guidelines and other IRS documents that state what the IRS (auditors etc) must follow in prosecuting or persecuting a taxpayer. In general, the IRS must follow the items that provide substantial authority. Proposed Regs are not substantial authority and therefore the IRS cannot follow them unless the taxpayer uses them and even then their use is severely limited.

I doubt that the list in the EBIA Manual was taken from the IRS Audit Guidelines (and I guess that I should go and take a look) but were nore likely taken from the Training Manual.

However, regardless of whether or not the 125 Proposed Regs are law or not, an FSA is still subject to rules of section 105 and while section 105 does not go into detail, logic dictates that you might have to prove that the reimbursement was made for actual medical expenses incurred and that the money receved was not otherwise reimbursed of deducted (such as on Schedule A).

In other words 105 can be made to be even more problematic than 125. Receipts and/or Third party substantiation should be done along with the employee statement if necessary.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Dick Boever

I recently met with a group of professionals that have operated what appears to be a discriminatory medical reimbursement plan for 20 years. The doctors get $4000+ reimbursed, the staff $300.

They now must decide whether to get legal or continue to play audit roullette, albeit now armed with the knowledge that what they have been doing is not legal.

Apparently, if they use an "insured plan" they can discriminate all they want. So of course an insurance carrier has designed an insured medical reimbursement plan where the premiums are 110% of the claims. The insurance company handles the claims for basically 10% of the claims submitted and charges a base policy charge.

The insurane company found a way to do what a group of individuals wanted to do and to make a profit along the way.

My point is, we as administrators (and by the way our company requires substantiation), tend not to think outside the box. There will always be a group of prospects/clients that want to push the envelope. As seen by what has happened with the "Benefits Cards". How many of us think these cards meet the letter or spirit of the "law" and have refused to support them. But there are a number of TPA's making a nice living taking clients away from those of us that have taken the high moral ground on this issue.

This TPA has merely taken the lack of written "law" and decided to use it to their advantage. I feel sure their enrollment form has some sort of statement attesting to the fact that the participant is responible for reviewing each claim and only submitting eligible expenses that have not or will not be reimbured by other means. The law does not say substantiation has to be done by a TPA or even someone knowledgeable.

As long as the TPA has the true extent of their services disclosed in their service agreement, which probably puts all responsibility on the participants, they are no worse than the TPA's that try and scare the client into thinking someone is actually auditing these plans.

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I think that plan administrators and TPAs often are not aware of the uncertainities and actual boundaries of regulation under the applicabie tax and benefit laws. Taxpayers, upon the advice of tax counsel, can and do tax positions "outside the box" in many tax law situations where there is no prohibition or the rules do not prohibit such a position. Some clients will take aggressive positions in areas which have not been defined under the applicable regs in order to save money or reduce taxes until the IRS issues rules that prohibit such action. In other cases the statute of limitations (generally 3 years) will limit any liability to the IRS. Finally an opinion of counsel can eliminate any liability for the tax penalities of up to 75% of the amount due for substantial understatement of taxes, even if the taxes still must be paid, leaving the client in no worse a position for taking an aggressive position.

mjb

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Not because an insurance company sells a plan that they claim to be an "insured" plan makes it so.

The original plan seems to have been pioneered back in the late 80's by Monumental Life under the name Exec-U-Med. They gave it up after learning that there were very serious questions that could not be answered satisfactorily.

Years later a plan with the same name appeared from another insurance company (Guarantee I think) with a KPMG opinion letter. For various reasons a small West Coast carrier, Lincoln National and Security Financial started selling similar plans.

Guarantee and Lincoln have since ceased.

The TPA who sold the Guarantee product is still selling the plan but now with an opinion letter from Ernst & Young.

I suggest that you ask yourself why there were not other players in this market and why some companies withdrew from the market. Then read the opinion letter and do some research.

The opinion letters try to address the first issue of whether or not the plan even qualifies as insurance. Most researchers should opine that it does not, even if only because there is no "risk exposure", which is a needed feature for qualification as insurance. There are many other areas that are very questionable which is probably why the old KPMG opinion letter had such a very long disclaimer.

I question whether or not any of the promoters could be able to get a new or current opinion letter of any credibility now that there are the new Treas Regs, Circular 230 Rules, AICPA and ABA ethics rules governing these opinion letters.

Anyone thinking of using these "insured" plans would be well advised to seek competent legal advice first.

mbozek,

I am sure that under the new rules only an opinion from the clients own legal advisor, which is based on the specific facts and circumstances of that particular client and that client's plan, could possibly maybe protect them from penalties if any at all. The rules are now such that these opinions give very little protection from penalties.

Of course, opinion letters provided by the promoter have absolutely no value at all.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I have had some experience on this matter with Exec-U-Care out of Iowa. (But not the other insurers listed by GBurns.)

Their product that I reviewed many of years ago I thought clearly didn't work, because the amount of the premium was simply a percentage of the claims. Thus, there was zero risk-shifting, which is essential to a finding that there is "insurance."

However, they have revised their product to introduce some risk-shifting. While it is isn't nearly as much as most insurance products, this is enough risk-shifting to be able to make an argument that the arrangement should qualify as insurance. While I can't say that I've spent enough time on this issue to feel comfortable concluding that it is insurance, it is a lot closer question than the first generation of their policies.

Kirk Maldonado

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Guest Ric Joyner,CFCI

Chris,

This TPA is out of Madison WI and I have reported them to Harry Beker. They also use Harry Beker in their literature and he is not happy that he is quoted out of context.

Here is the "lie" that they are perpetuating.

1. That the employee is responsible for the claim if they are ever audited.

This is not correct. The employer is totally reponsible for abuses in the plan and when there is not oversight of claims there is abuse. Also, the other area they are grossly wrong in is that this is not a personal plan like an MSA where there the employee IS responsible. This is a group health plan in the IRS eyes and thus section 125-2 regs apply that an independent third party review the claims before paying them JUST LIKE IN HEALTH INSURANCE.

2. Following the thread of above that is why the health FSA is subject to COBRA. Ric Joyner, CFCI

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Guest Ric Joyner,CFCI

Chris,

This TPA is out of Madison WI and I have reported them to Harry Beker. They also use Harry Beker in their literature and he is not happy that he is quoted out of context.

Here is the "lie" that they are perpetuating.

1. That the employee is responsible for the claim if they are ever audited.

This is not correct. The employer is totally reponsible for abuses in the plan and when there is not oversight of claims there is abuse. Also, the other area they are grossly wrong in is that this is not a personal plan like an MSA where there the employee IS responsible. This is a group health plan in the IRS eyes and thus section 125-2 regs apply that an independent third party review the claims before paying them JUST LIKE IN HEALTH INSURANCE.

2. Following the thread of above that is why the health FSA is subject to COBRA.

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Guest Chris Koch

Thanks Ric for the response regarding the TPA who markets their flex plan administration as not requiring receipts. You are absolutely correct this TPA is out of Madison, WI and just this past week I had a chance to have lunch with two of their sales reps to better understand the position they have taken. Everything you mentioned in your e-mail is 100% correct and while I am in total agreement with you that their position is not compliant with Section 125, they made it apparant to me they have no intention of changing it. They also seem to be making a presence here in Mpls and I have had several of the brokers that we work with directly, contact me in regards to the claim substantiation rules, asking that I substantiate my position! I also thought about contacting Harry Becker and I am wondering if he was able to provide you anything in writing that would confirm our position~as a TPA of flexible benefit plans that we are in fact required to review receipts from independent third parties prior to reimbursing out of the flexible spending accounts. Once again I appreciate your response.

Chris Koch

Benefit Extras, Inc.

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CORRECTION

The original plan is Exec-U-Care not Exec-U-Med. Exec-U-Care is still being sold by that same TPA out of Iowa and is using the E&Y opinion letter as a replacement to the old KPMG letter.

Both opinion letters skirt the issue of whether or not and how, if at all, the plan qualifies as insurance. Instead the try to avoid a dirct answer by stating that the plan "is not" a "self-insured" plan.

Exec-U-Med is available through the west coast insurance company. I also noticed that Boston Mutual has a version that is available in some states with somw restrictions.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Ric Joyner,CFCI

Chris you do not need to defend your position. Your agents need to beef up their E&O insurance if they plan to use them. Go to section 125-2 and read about the claims substantiation and show them the actual regulations. This TPA needs to defend their position. They are focused on the individual and it is a flat out lie that they are perpetuating AND THEY KNOW IT. I would also call Harry Beker and report them. Call me and I will fax you some materials. They are trying to go after new markets because they get slammed here and they are viewed as "very low" class in WI. They have lost much business here. So if your agents want to work with them tell them " caveat emptor" (buyer beware) Also my number is 608-243-8277 ext 125 call sometime.

Ric Joyner, CFCI

eflexgroup.com

2002 President WI AHU

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Prop. Treas. Reg 1.125-4, Q/A-7 clearly

states claims must include independent third-party verification of the expense, expenses must be incurred during the plan year and all other sources of reimbursement must be exhausted prior to the 125 plan reimbursing. Reimbursing expenses without adjudicating them for these requirements (as well as the others such as medically necessary, not cosmetic, for a valid tax dependent, ect.) would take the plan out of compliance. Even if these requirements could be explained away, it would be very hard to argue that the average employee, even with extensive educational materials, is able to properly determine if their claims are valid. The court ruling (last year I believe) which ruled in favor of an employee to be reimburse an expense not in the plan year, was decided because the plan sponsor only referenced the regulations but did not clearly define the word "incurred" in their educational materials. Since the average employee does not have easy access to those regulations, the court decided in the employee's favor. This court decision should be instructive to employers on this issue of responsibility as a plan sponsor. The burden is not on the employee.

There are many sources to clearly document this practice is exactly what a couple people have already stated, a way to make a quick buck with no concern for properly adjudicating the plan, establishing a long term relationship with employer and employee or protecting the participants and employer from future adverse tax implications. It is not a "service" anyone should be paying for. A notice to clients (without mentioning any specific company, of course) detailing the correct procedures utilized by responsible TPAs and warning about this "the too good to be true" approach, might be a positive step to take.

This seems to fall into the same category as the "double dipping" on the premiums, which was marketed nationwide until the IRS issued a ruling letter prohibiting them. Many sources prior to that letter advised those plans were not valid; however, it took the ruling letter to put an end to them. The ruling letter on that issue might also be helpful to demonstrate to clients just because someone is marketing a "service" or type of plan, does not mean it is legal.

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Lisa,

Since you mention the "Double Dipping" schemes, What is your comment on the "Premium Reimbursement Account" post that is currently on this Board?

If Rev Ruling 2002-3 explains that premium that was deducted on a tax free basis cannot be reimbursed tax free (Double-Dipping), What premiums are being referred to as reimburseable in an HRA?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Lisa: The proposed regs are not binding on the taxpayer and therefore cannot be enforced by the IRS. See IRC 7805(B). Also under IRC 6501 the IRS generally has three years for collecting back taxes. If the IRS cant figure out the guidance for 125 plans 25 years after the section was adopted why should taxpayers be penalized for adopting thier own procedures? See IRC 125(i).

mjb

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