expense substantiation rules

[Guest tellidaho]

Client's FSA administrator offers a system where participants can elect to have payments made directly to healthcare/daycare provider. Participant enters info (service, date, amount, provider) on adminstrator's web-based system. Administrator then sends check to provider. Check stub indicates participant's name, type of service (medical, dental, etc.), date of service, and amount. Face of check indicates that endorsement certifies payment is for qualified healthcare or daycare expenses. I'm concerned about this process under current cafeteria plan proposed rules re: expense substantiation. Administrator indicates check constitutes third party verification of expenses due to endorsement statement and that because check has to be endorsed prior to payment, it meets the requirement for substantiation prior to payment. Thoughts?

[LRDG]

I don't consider this process as one that meets IRS required burden of proof that an actual 'document' provides, lacks the required and appropriate review for eligibibelity that's provided when claim documents are reviewed by plan administrators.

The process described lends itself to interpertation by the participant with respect to information in an EOB, such as contract discounts, ineligible charges, deductiables and similar information, some of which is frequently mis-interperted by participants as an eligible expense when it is not. FSA claims administrators are routinely questioned by participants regarding why discounted amount on an EOB were not paid from their medical FSA, suggesting the reimbursement amount was less than the full eligible amount.

Aside from the potential for unintentional abuse, the process described in your post lends itself wide open to intentional abuse by participants. Consider a participant faced with forfeiture, or one terminating employment mid-year.

The plan sponsor has a large stake in the integrity of the plan and it's administration, considering IRS penalties, the possibility that the entire plan could be deemed 'ineligible' due to unsatisfactory claim substantiation.

[GBurns]

As I read the rules, substantiation/claims adjudication must take place BEFORE reimbursement.

Relying on the service provider's signature and acceptance of the payment terms in the manner proposed does not seem to meet that requirement. It also leaves too much room for misuse and abuse.

[LRDG]

The process described by tellidaho, eliminates IRS required independent claim determination/review process, transfering that burden to the plan participant via participants claim data entry info, and to the service provider, by including endorsement statement on the check.

The assumption based on this process is that the claim payment/reimbursement is in deed made after the data is entered into the system, meeting that requirement that payment/reimbursement is made after the claim is 'adjudicated' by a system that relys on accuracy of participant data entry.