IRS Information Letter Addresses Substantiation Requirements for Debit Card Programs

The IRS has released an information letter addressing the substantiation rules for health FSA debit card programs. The letter responds to an inquiry from a health FSA participant whose card was declined at a medical facility that did not have an “IRS qualified” merchant category code (MCC). The participant asked why the IRS did not recognize the facility as qualified to receive card payments.

The letter explains that health FSAs and other employer-sponsored health plans with debit card programs must comply with IRS rules that generally limit card use to physicians, dentists, vision care offices, hospitals, or other medical care providers, as identified by MCC. MCCs are not assigned by the IRS, however; they are determined by the provider and card issuer. The letter suggests that the participant ask the plan about other methods for obtaining reimbursement of medical expenses, such as by submitting a reimbursement claim accompanied by third-party information to substantiate the claim.

EBIA Comment: This IRS information letter does not break new ground or include any surprises. But like other recent IRS information letters (see, for example, our Checkpoint article), it may be helpful to those on the “front lines” of cafeteria plan administration, who are sometimes asked to explain the reasons for plan operating rules and decisions. While not mentioned in the letter, the debit card program rules allow card transactions at merchants without a medical care provider MCC if an inventory information approval system (IIAS) is in place to ensure that cards are used only for eligible medical care expenses and certain recordkeeping requirements are met. Thus, medical care providers that do not have a medical care provider MCC could use an IIAS for card transactions. For more information, see EBIA’s Cafeteria Plans manual at Sections XXI.G.2.d (“Cards Only Used at Medical Care Providers, Certain Pharmacies, and Merchants With Inventory Information Approval Systems”) and XXI.G.3 (“Substantiation Rules for Card Transactions at Medical Care Providers and 90% Pharmacies”). See also EBIA’s Consumer-Driven Health Care manual at Section XXIV.D (“HRA Reimbursements: Substantiation”).

Contributing Editors: EBIA Staff.