NU Online News Service, May 8, 2003, 5:51 p.m. EDT – The Internal Revenue Service says employers can use debit cards, credit cards and the Web to run flexible spending arrangements and health reimbursement arrangements.

But, to ensure that employees can exclude FSA and HRA contributions from taxable income, an employer’s procedures must “specifically limit reimbursements or payments of claims to eligible medical expenses,” according to Barbara Pie, an IRS associate chief counsel.

An employer does not have to get a receipt for every transaction, but administrative procedures should substantiate that every claim paid seeks reimbursement for an eligible medical expense, Pie writes in IRS Revenue Ruling 2003-43.

The ruling is scheduled to appear May 27 in Internal Revenue Bulletin 2003-21.

For companies that want to develop card-based and Web-based FSA and HRA administration systems, the ruling “is an absolute help, with no qualifications,” says Donna Porritt, a senior vice president in a division of Evolution Heatlh L.L.C., Avon, Conn., that sells card-based administration systems. “This is nothing more than a clear victory for the whole market.”

FSAs and HRAs are authorized by Section 105 of the Internal Revenue Code. The section lets employees exclude contributions to FSAs and HRAs from taxable income, but it also lists complicated rules for determining which expenses are eligible for reimbursement.

Some FSA and HRA participants fail to seek reimbursement for expenses that are eligible for reimbursement simply because they have too little time to file the required receipts, and some employers shy away from offering FSA and HRA programs because of the administrative hassles involved, benefits experts say.

Evolution Health and its competitors offer card-based systems to ease administration, but some employers have been wary because of lack of IRS guidance on use of cards, Porritt says.

In the new revenue ruling, Pie describes an employer that requires receipts or similar substantiation for most claims. But the employer does without receipts when an employee spends an amount equal to a health plan co-payment at a doctor’s office or other health care facility; when an employee spends the same amount for an eligible good or service, such as a prescription drug refill, on a regular basis; or when some entity, such as a pharmacy benefit manager, uses electronic systems to immediately notify the employer whether a charge was for an eligible medical expense.

The same employer also has a program in place for getting money back from workers when workers end up getting reimbursed for what turn out to be ineligible expenses, Pie writes.

Pie then describes an employer that polices use of FSA cards solely by checking some of the FSA claims to see whether they were really eligible for reimbursement.

The procedures adopted by the first employer comply with the relevant rules and regulations, but the sampling techniques adopted by the second employer “do not provide that every claim is substantiated,” Pie writes.

Because the second employer’s procedures do not substantiate every claim, employees who use its FSA might end up having to include FSA contributions in their taxable income, Pie concludes.