The Internal Revenue Service has issued guidelines in an effort to help the companies that are developing health account payment card systems.
The guidelines, given in IRS Notice 2006-69, spell out some of the rules workers and employers must follow to show that they are spending health account assets on a qualified items, such as visits to doctors and allergy pills, and not on items such as books or hairbrushes.
Because the law that created health savings accounts does not require members of employer-sponsored HSA plans to “substantiate” purchases, the new notice applies mainly to workers who are using debit cards to draw on flexible spending accounts and health reimbursement arrangements.
Card system vendors are pushing for substantiation rules that minimize the number of times card users must provide paper receipts to document health account expenditures.
Up till now, the card companies have focused mainly on setting up electronic substantiation programs involving large drug store chains.
Under the Notice 2006-69 rules, any retailer can accept health cards if it uses “stock keeping units” or other inventory control information when approving or rejecting health account card transactions, officials write in the notice.
“Card transactions using this method are fully substantiated without the need for submission of a receipt by the employee or further review,” officials write.
But the officials denounced employers that simply ask employees to “self-substantiate” health account expenditures, by providing a list of health account expenditures without supply any receipts.
If an employer lets FSA or HRA holders self-substantiate, those plans will lose their tax breaks, and the employees will have to include the FSA and HRA contributions in their taxable income, officials write.
The IRS is allowing limited use of automatic substantiation systems that approve claims submitted by medical offices, pharmacies and other entities with “health care related merchant category codes.”
Payment card companies can approve these claims automatically as long as the transaction involves a payment that is equal to 100%, 200%, 300%, 400% or 500% of the relevant copayment amount.
If, for example, a health plan charged a $10 copayment for purchases of name-brand prescription drugs, a consumer could use a health card to pay $50 in prescription drug copayments at one time without sending the FSA administrator a receipt.
The IRS also has decided that holders of dependent care accounts can use cards to pay for daycare and other eligible forms of dependent care. But the card holders can use the cards only to pay for care after the care has been provided, not before the care is provided, officials say.
A copy of Notice 2006-69 is on the Web at Document Link