When employees use a debit card linked to a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA), some purchases cannot be automatically verified. In these cases, employees must provide receipts or other documentation to confirm that the expenses qualify for tax-free reimbursement.
If employees do not provide the required documentation after repeated requests, HR may deactivate their debit cards. HR should review outstanding claims before year-end and help employees resolve them to avoid potential tax and compliance issues.
Five Steps HR Can Take to Maintain FSA/HRA Compliance
1. Understand the Substantiation Requirements
IRS rules require FSA and HRA expenses to be properly documented. While some debit card transactions can be verified automatically, others require additional documentation.
The plan administrator typically requests receipts when additional documentation is needed. If the employee does not respond after repeated requests, the administrator may deactivate the debit card.
Why it matters: Failure to follow substantiation rules can put the plan’s tax-favored status at risk.
2. Review Outstanding Claims Before Year-End
If an employee does not provide the required documentation, HR may need to help resolve the outstanding claim before year-end.
Ask your FSA/HRA administrator for a report identifying claims that remain unsubstantiated. Use the report to determine which employees need follow-up and ensure outstanding claims are addressed promptly.
3. Protect Employee Privacy
Reports of unsubstantiated claims may contain protected health information (PHI). Employers should follow applicable HIPAA requirements and their established privacy and security procedures when accessing and handling this information.
Best practices include:
- Limit access to authorized employees who oversee FSA/HRA administration.
- Use secure systems and appropriate access controls, including multifactor authentication where available.
- Store and transmit information securely.
- Do not share claim details with an employee’s supervisor or send sensitive information through unsecured work email.
- Follow your organization’s policies for retaining and disposing of sensitive information.
4. Help Employees Resolve Outstanding Claims
HR can often help employees resolve outstanding claims by identifying what documentation is missing and explaining how to obtain it.
Common solutions include:
- Requesting a receipt or Explanation of Benefits (EOB): Confirm that the document includes the information required by the plan administrator. Employees may be able to download an EOB through their health insurance carrier’s website.
- Resolving submission issues: If an employee has tried to submit documentation but the system will not accept it, work with the administrator to identify the problem.
- Addressing ineligible expenses: Some products marketed as eligible health expenses may not qualify under IRS rules. For example, certain wearable health devices may not qualify as medical expenses without meeting specific requirements.
If an expense cannot be substantiated, the employee may need to repay the plan according to applicable plan procedures.
5. Address Unresolved Claims Before Year-End
If an employee cannot provide the required documentation, the employer and plan administrator should determine the appropriate resolution under the plan’s terms and applicable law.
Depending on the circumstances, repayment may be necessary. Any repayment through payroll deductions or offsets against future reimbursements must be handled in accordance with applicable requirements and with any necessary employee authorization.
If the employee does not cooperate, consult the plan administrator and legal or tax counsel to determine the appropriate next steps. Potential options may include established debt-collection procedures or, where legally permissible, reporting an amount as taxable income on the employee’s Form W-2.
Important: Treating an unsubstantiated expense as taxable income is not a substitute for following the plan’s substantiation requirements. Employers should not use this approach routinely, as repeated failures to substantiate claims can create broader compliance concerns.
HR’s Year-End Checklist
- Request an outstanding-claims report from your FSA/HRA administrator.
- Identify employees with unresolved debit card transactions.
- Follow up with employees and explain what documentation is needed.
- Work with the administrator to resolve receipt-submission issues.
- Arrange repayment when required and permitted.
- Protect employee information throughout the process.
- Consult your plan administrator and legal or tax counsel about unresolved cases before finalizing year-end reporting.
Proactively reviewing unsubstantiated FSA/HRA claims before year-end helps employers address outstanding issues, maintain compliance, and avoid potential tax reporting complications. Partner with your plan administrator to ensure unresolved claims are addressed promptly and employee information remains protected.
This material is provided for general educational purposes only and is not intended to constitute legal or tax advice. Requirements and implementation dates may change as additional guidance becomes available. Employers should consult their benefits advisor and legal counsel regarding their specific obligations.