A common question we receive at Zane Benefits is, "What are the minimum substantiation requirements for Health Reimbursement Arrangements (HRAs)?"
In other words, what does the employee need to show an employer in order to receive tax free reimbursement for medical expenses from an HRA?
Here's the answer...
IRS Notice 2006-69 "clarifies certain substantiation methods and requirements that apply to all medical reimbursement plans whether or not a card is used" for self-insured medical expense reimbursement plans (i.e. HRAs and health FSAs).
Specifically, Notice 2006-69 sets out rules for Direct Third-Party Substantiation using Explanation of Benefits (EOBs) and the Prohibition Against Substantiation.
According to Notice 2006-69 (see "Direct Third-Party Substantiation"):
If the employer is provided with information from an independent third-party (such as an explanation of benefits from an insurance company (EOB)) indicating the date of the § 213(d) service and the employee’s responsibility for payment for that service (i.e., coinsurance payments and amounts below the plan’s deductible), the claim is fully substantiated without the need for submission of a receipt by the employee or further review.
Consequently, an IRS-compliant HRA substantiation process requires that employees provide an EOB detailing the exact date of service for each medical expense reimbursed under the plan. Notice 2006-69 provides the following example:
Example. Employee D is a participant in the health FSA sponsored by Employer X and is enrolled in X’s medical plan. D visits a physician’s office for medical care as defined in § 213(d). The cost of the services provided by the physician is $150.00. Under the medical plan, D is responsible for 20% of the services provided by the physician. X has coordinated with the medical plan and X or its agent is automatically provided with an EOB from the plan indicating that D is responsible for payment of 20% of the $150 (i.e., $30) charged by the physician. Because X has received a statement from an independent third-party that D has incurred a medical expense, the date the expense was incurred, and the amount of the expense, the claim is substantiated without the need for D to submit additional information regarding the expense. D has sufficient FSA coverage for the claim, which was incurred during the coverage period. X’s FSA reimburses D the $30 medical expense without requiring D to submit a receipt or a statement from the physician.
If the HRA plan reimburses an employee for an expense without proper substantiation, the plan is considered to have reimbursed the expense based on an employee's "Self-Certification".
According to Notice 2006-69 (see "Prohibition Against Self-Certification"):
Section 105 and § 125 require the substantiation of all medical expenses as a precondition of payment or reimbursement (including the automatic substantiation methods described in Rev. Rul. 2003-43 and this notice). “Self-substantiation” or “self-certification” of an expense by an employee-participant does not constitute the required substantiation.
If the HRA plan violates the substantiation requirements under Section 105(b), then all reimbursements under the HRA plan become taxable. Notice 2006-69 provides the following example:
For example, a health FSA or an HRA does not satisfy the requirements of § 105(b) if it reimburses participants for expenses where the participants only submit information (including via internet, intranet, facsimile or other electronic means) describing medical expenses, the amount of the expenses, and the date of the expenses, but does not provide a statement from an independent third-party (either automatically or subsequent to the transaction) verifying the expenses. Under § 1.105-2 of the regulations, all amounts paid under a plan that permits “self-substantiation” or “self-certification” are included in gross income, including amounts reimbursed for medical expenses whether or not substantiated.
Note: None of this should be taken as legal or tax advice.