Receipts on Medical & Daycare

[Guest jhersman]

Another third party administrator told me they kept no receipts on medical or Daycare. The client merely calls and tells them what their expenses were and they pay them without receipts. They say you keep your receipts in case you ever get audited. #1 where in the IRS code does it say the employee keeps the receipts without turning them in.#2 is this not the responsibilityof the administrators, talk about opening the door to fraud. Is this legal?

[GBurns]

Why would the TPA care that an employee committed fraud?

I am not that familiar with DCAP but as far as medical expenses go, the first question is...

Why do you think that the code requires a receipt for medical expenses???

While it is wrong to make medical expense reimbursement without substantiation, there is no law requiring that reciepts be submitted, in fact the law does not even require that the employee must first pay before reimbursement. So it is possible, by law to get reimbursed without a receipt.

It is also sensible that the employee keep receipts in case of an IRS audit. Your IRS audit is no concern of the TPA. If the TPA keeps your receipt what would you use in an audit? I am sure that the TPA meant that you should keep a copy if you sent in the original or vice versa.

In a nutshell, you keep copies of your receipts and the law does not require the TPA to get receipts.

[Guest RAJ]

What about Prop. Treas. Reg. 1.25-2 Q&A7(5) Claims substantiation? It does indicate that a written request must be submitted. Granted, a written request for reimbursement does not specify attached receipts. However, it seems an verbal request would not be adequate. In the situation described, how does the TPA determine they are eligible expenses under IRC 213? Or are they placing that liability on the participant?

[GBurns]

I agree that verbal should not be adequate, but note that the poster said that the client calls it in not the employee. Maybe the TPA is relying on the client as the substantiating third party which is all that is required of the TPA. When the claim is called in the expense is specified which is when the eligibility could be decided.

A bad system but not illegal.

[KIP KRAUS]

Question. What happens when the IRS audits the TPA? Does the TPA have to prove that the expenses he's been reimbursing fall under the IRS regulations?

[GBurns]

Good question.

The audits reports that I have seen place the onus on the Plan sponsor (the Employer) for underwithholding and misreporting taxable income and a little burden on the employee for underreporting.

The emphasis is on the employer because that is where there is more money to be gained. It is possible that even if the employee reports the ineligible reimbursement on his tax return, it might not create any new tax because of exemptions and deduction etc.

However, the employer was supposed to withhold FICA, match the FICA and is liable for penalties for not doing so. Also it might not be enough for contesting so the IRS wins even by default.

The TPA as a service provider carrying out the instructions of the Plan Sponsor who usually is also listed in the Plan document as the Plan Administrator, is not liable in this regard.

I would hope that an affected employer would sue the TPA for poor professional advice and conduct etc.

[Guest jhersman]

My question was not when the client (employer) called in. I was informed that the employee could simply call in and state what amount they needed reimbursed without sending any receipts for proof. In addition, it was my understanding that the TPA was responsible for making certain the claims fell under the eligible MedFSA qualification list. The company I was referring to stated that they did not require receipts to reimburse for daycare expenses either (the employee).The employee keeps all receipts yes they put the burden on the employee.

[GBurns]

Well, you said that the client called in you did not say the employee did.

In any case it is the employee who is not to make frudulent claims and not to make ineligible claims. Amounts in excess of actual claims is gross income to the employee, so it is the employee's area of control.

[Guest jhersman]

Would you spell out the duties of a TPA. What would the employer need with us if in fact it worked the way you discribe.The IRS rules have not changed that I know of A lot of companies are in violation because they don't know the rules but this is no excuse for the TPA 's to follow.The X-IRS person I spoke with says if you have [NO receipts] you have not substantiated the claim it is my understanding this is not something we take one's word for. I Wish it was that easy.I am open to other views on this issue Thanks

[GBurns]

What the duties of a TPA is is whatever the TPA is contracted to do and which they decide to do. I suggest that we hope for some input from some of the many TPAs who participate in this Board.

One of the problems that the public faces in calling the IRS is that they do not realize that there is no guarantee of any expertise from the telephone customer service person who takes your call. The Tax Code is difficult enough for seasoned trained professionals, how much expertise can you expect from a random CRS? Various reports including reports from the GAO have claimed that as much as 75% of the answers given are wrong even when being read from the CSR guide.

I suggest that you look at the governing Treas. Regs. 1.125-2 Q&A 7 (5) and (6) which cover Claims substantiation and Claims incurred. They clearly state "only if the participant provides a written statement from an independent third party.." and "and not when the participant is formally billed or charged for, or pays for the medical care." There is no requirement that payment be made therefore there cannot be a receipt.

The determination that a written statement has been presented might not be within the jurisdiction of the TPA but the employer, with the TPA being simply a service provider not a claims adjudicator.