Require Payment Before Reimbursement

[Guest AEA]

This is bugging me because I feel like I should know the answer ....

Standard FSA medical reimbursement account - can it be drafted to require the participants to show proof of payment of the expense prior to reimbursement of the medical expense under the plan?

The employer is a medical facility that is mad about several employees who have turned its bills into the FSA and been reimbursed but then never paid their bills at the medical facility. The question was whether the employer could "force" the participants to use the reimbursements to pay their medical bills. Two options came to mind: require proof of payment prior to reimbursement or require that all unpaid medical bills be paid directly by the plan.

Any thoughts (with cites to supporting law, if any)?

[Guest Joe D]

This is bugging me because I feel like I should know the answer ....

Standard FSA medical reimbursement account - can it be drafted to require the participants to show proof of payment of the expense prior to reimbursement of the medical expense under the plan?

The employer is a medical facility that is mad about several employees who have turned its bills into the FSA and been reimbursed but then never paid their bills at the medical facility. The question was whether the employer could "force" the participants to use the reimbursements to pay their medical bills. Two options came to mind: require proof of payment prior to reimbursement or require that all unpaid medical bills be paid directly by the plan.

Any thoughts (with cites to supporting law, if any)?

The law only requires a written statement that a covered medical expense has been incurred and not reimbursed or reimbursable under another plan. (Treas Reg 1.125-2) I also work for a medical facility. My suggestion is that the business office adds a payroll deduction authorization to the financial registration process for patients covered under either the employee health plan or health FSA plan. Works very well.

[leevena]

No, you cannot require payment be made. Regs state "incurred", not "paid" as a requirement.

As for your problem about employees not paying their bills, this seems to be a situaiton that can be settled in the employers HR department, or collections department. You have an employee who purchases a service or a good from you and then does not pay? At first, I would go after them as non-payment, just like any other customer that does not pay their bill. If that does not work, why not just fire them. I know this sounds harsh, but I would view what they are doing as stealing from the employer.

Good luck.

[Guest AEA]

Thank you both! While I really like the payroll deduction idea, I would be concerned about HIPAA and would need to look at whether that would be allowed.

Thanks again!

[QDROphile]

I seem to be missing something. I understand that the regulations require that a qualifying expense be incurred in the coverage period before it can be paid by the employer, but that does not require the plan to deliver funds to the individual. Please explain why the plan cannot be designed only to reimburse amounts actually paid or pay the provider directly upon substantiation of the qualifying expense.

[GBurns]

Isn't "paid by the employer" the same as "deliver funds to the individual"?

How does one pay without delivering?

The Prop. Regs state incurred as the basic requirement for substantiation. I doubt that we can add anything to that.

[QDROphile]

GBurns:

Under a health FSA, the employer provides health benefits to an employee rather than cash compensation. An employer provides health benefits when the employer directly pays amounts to the provider of the goods or services. An employer also provides health benefits when it reimburses the person who paid the provider of the goods or services. I believe that the employer is entitled to make sure that the employer is directly or indirectly paying for the goods or services rather than simply delivering cash to an employee without regard for the use of that cash for provision of health benefits.

Now that I have given a serious response to your inane question, I invite you to give me thoughtful support for the position you take with Joe D and leevena, which I happen to believe is incorrect. To be more specific, I do not think that the language in the regulation concerning substantiation that qualifying expenses were incurred compels an employer to deliver funds to an employee. Incurring the expense is a necessary prior condition to payment of the expense (or reimbusement of payment of the expense), but has nothing to do with the method of payment of the expense.

[leevena]

QDROphile...I seem to be a little confused by your comments. My comment "No, you cannot require payment be made" is in response to the question asked by AEA about if the employer can require the FSA participant to pay their medical bills with the dollars distributed from the FSA account.

Are you saying that I am wrong and that this employer can require the employees to use their FSA distribution to pay their bill? Let me know when you get a chance.

[QDROphile]

The employer can require proof of payment before reimbursing the employee or the employer can pay the provider directly.

[Guest AEA]

Actually, payment directly to the provider is one of the options I decided to suggest to the employer. The 125 regulations do not directly support requiring payment before reimbursement (although there could be an argument that Code section 105 does and also applies, but I don't know if I want to open that up); but, I do not think that they preclude it either. After all, doesn't "reimbursement" itself imply that payment was already made?

However, I have seen a number of plans with language allowing the employer to pay the provider directly. I believe (as QDROphile, I think, pointed out) that nothing in 125 says that payment needs to be made to the participant.

Thank you, everyone, for your comments. If the employer really wants payment first, I think that I will suggest balancing it out with a provision providing for payment directly to the provider, so long as all HIPAA requirements are met.

[LRDG]

FINAL-REG, 2002FED ¶12,541, §1.213-1, Medical, dental, etc., expenses.—

§1.213-1 Medical, dental, etc., expenses.—

Caution: Reg. §1.213-1 does not reflect recent law changes. For details, see ¶12,541.01.

(a) Allowance of deduction.—(1) Section 213 permits a deduction of payments for certain medical expenses

(including expenses for medicine and drugs). Except as provided in paragraph (d) of this section (relating to

special rule for decedents) a deduction is allowable only to individuals and only with respect to medical expenses

actually paid during the taxable year, regardless of when the incident or event which occasioned the expenses

occurred and regardless of the method of accounting employed by the taxpayer in making his income tax return.

Thus, if the medical expenses are incurred but not paid during the taxable year, no deduction for such expenses

shall be allowed for such year.

[QDROphile]

LRDG:

Please explain the bearing of your post on the discussion. I am not getting your point.

[Bob R]

I agree with QDROphile here. The quote to 213 does point out one practical consideration.

As pointed out, the health FSA can only pay "incurred" expenses. Imposing additional requirements generally isn't a problem. Thus, putting a provision in the plan to require that the expense be both incurred and paid seems permissible. It doesn't violate the FSA rules b/c you are not permitting the reimbursement of expenses that have not been incurred.

The quote to section 213 does point out one of the basic differences between an FSA and the deduction. The deduction under 213 is based on when the expense is paid whereas the FSA is based on incurred. Suppose an expense is incurred in Dec. 2006 and the bill is paid in January 2007. If an FSA requires that the expense be both incurred and paid, then when the claim is submitted in Jan. (or later) it would need to be treated as an expense for the 2006 FSA year. It could not be treated as an expense, for FSA purposes, for the 2007 year.

Other than that practical issue, I see no problem with a plan provision requiring payment of the expense.