8814 / What are the substantiation requirements that apply to QSEHRAs? What penalties apply for failure to satisfy these requirements?

In order for reimbursements from a QSEHRA to be received income tax-free by the employee, the reimbursements must related to medical expenses and may not constitute funds that the employee would be entitled to receive regardless of his or her medical expenses. Therefore, all claims for reimbursements must be substantiated (no additional substantiation is required if the sponsoring employer pays the insurance premium costs directly to the insurance company) in the same manner as required of health flexible spending accounts (FSAs).¹ This means that documentation from a third party (such as the insurance company or medical care provider) must be provided.

If reimbursements are mistakenly made when the required substantiation has not been provided, all payments to the employee (whether substantiated or unsubstantiated) on or after the date that the mistaken reimbursement was made are taxable. However, if the employee timely (see below) substantiates or repays the unsubstantiated amounts with after-tax funds, the QSEHRA will be deemed to have satisfied the substantiation requirements. This same treatment applies if the QSEHRA mistakenly reimburses the employee for non-medical expenses.

Substantiation or reimbursement of improperly paid QSEHRA funds is deemed to be untimely if paid after the earlier of (a) March 15 of the year following the year in which the error was identified or (b) if the employer’s tax return is under examination by the IRS, the date the employer receives written notice of the error.²