The Audit of OTC Receipts and Prescriptions

[Guest ChristheFSAGuy]

It is my understanding that the new regulation means TPA will need to check every FSA, HRA, HSA receipt and prescription. Can TPA audit instead? I.e Only look at a percentage of receipts/prescritptions to ensure people are doing it right?

If there are rules against it, what happens? What do you do (and what is your risk) if you find out your TPA is not checking every receipt.

[LRDG]

I'm not sure I understand your question. In particular your reference to "The Audit of OTC Receipts and Prescriptions, How does the process for receipts and prescriptions for FSA work".

There is no IRS audit requirement under Sec 125, for OTCs or other expenses. The only audit policy I'm aware of would depend on the plan sponsor's or administrator's internal audit policy. A tax audit conducted by IRS would not likely be of such limited scope to include only OTCs, but would probably include an audit of payroll practices that would include pre tax FSA deductions, or a financial audit that would include an audit of all plans administrated by an administrator. I'm not aware of required audits specifically for OTC meds or "non-drug items".

According to IRS regs, all FSA claims are required to be substantiated with supporting documents such as receipts and/or RX, by a 3rd party qualified to make claim determinations. I would be concerned for any TPA making FSA reimbursements that do not meet the IRS requirement that claims be substantiated, even claims for OTC drugs or claims for non-drug items.

The consequences if ineligible unsubstantiated claims were to be paid to participants, are usually borne by the plan sponsor who will likely be subject to IRS fines and penalties, payment of all employee and employer taxes otherwise due under the plan if the validity of the plan is nullified by IRS as a result of not substantiating claims. The plan sponsor will probably take legal action against the TPA to cover legal fees and IRS fines and penalties, participants income and withholding taxes, and ER payroll taxes that are usually excluded from taxes under a valid plan.

ChristheFSAGuy, disregard references to non-drug items. It was obviously much later than I thought.

There is confusion about "non drug items". Non drug items is terminology not found in the tax code nor is it terminology used by IRS. It is terminology that is the invention of and used by plan administrators to facilitate communicating to participants items that may be eligible based on analysis of and by extripolating from Sec. 213 medically necessary equipment and/or supplies that may include OTC durgs/meds per IRS and non drug items as described by administrators.

Non-drug items, terminology not found in the tax code but used by plan administrators, and OTC drugs/meds, terminology refered to by IRS, will continue to be eligible only through December 31, 2010, due to IRS amendments the result of health care reform.