Comments Concerning Cafeteria Plan Regulations
Under Internal Revenue Code Section 125

III.  Comments

E.  Comments on the Final 2000 Regulations and previously issued cafeteria plan regulations

3. Use of electronic claims reimbursement
    
4. 1. Explanation of Rule

   2. The 1989 Regulations require Health and Dependent Care FSA claims to be substantiated before reimbursements are made to the participant. Specifically, the plan must receive (1) a written statement from an independent third party stating that the medical or dependent care expense has been incurred and the amount of the expense, and (2) a written statement from the participant that the medical or dependent care expense has not been reimbursed or is not reimbursable under any other applicable plan. Prop. Treas. Reg. §1.125-2 Q&A-7(b)(5).

      Many employers have already adopted or are in the process of adopting electronic claims processing and reimbursement procedures in an effort to simplify FSA operations and reduce administrative costs. Some of the common processing and reimbursement procedures are annual participant statements of recurring medical and dependent care expenses, automatic reimbursement of deductibles and co-payments based on EOB statements, and in the extreme example, the use of debit cards for medical expenses. Employers have adopted these procedures despite any formal guidance from the Service. Guidance on the following issues would be useful:

      1. what type of documentation would substantiate an electronic claim; and
          
      2. whether the employee must consent to the provider filing the claim electronically.
   3. Recommendation

   4. One of the ways to make the two-part substantiation requirement more flexible would be to only require that the participant statement (i.e., the statement that the expense has not been reimbursed or is not covered under any other plan) be provided to the plan once per year, such as during annual enrollment for example. As a matter of course, participants are not required to provide any such similar statement (e.g., the participant is not required to state that he or she will not commit fraud by filing the same claim with other health insurance carriers) when he or she files a claim with component health plans.

      Further, another way to simplify the substantiation requirement that requires only medical expenses (as defined under Code §213) be reimbursed through a health FSA is to allow automatic reimbursement of deductibles, co-payments and other amounts to be automatically reimbursed based only on the submission of an EOB (or its electronic version) to the health FSA directly by the component health plan or its administrator. Since component health plans must only reimburse or pay for medical expenses in order to have such reimbursement or payment be tax-free to the participant, this should be a simple change to make.

      Since most dependent care fees are paid on a weekly, bi-weekly or monthly basis and are the same amount each time, allowing reimbursements of recurring expenses without substantiation for each payment would simplify administration. This could be accomplished by allowing annual statements and substantiation for the first payment at the beginning of the year and requiring participants to notify the plan in the situation where payments were not made or were stopped. As an alternative, quarterly or bi-annual “audits” could be required of a certain percentage of the aggregate recurring claims reimbursed for all participants during a year. In addition, the dependent care provider can directly submit claims directly to the plan administrator. Payments to providers could be included on monthly statements to employees and if employees question the claims submitted by the provider, the employee could review the claim with the plan administrator.