This guest post was written by Stephen Honig, CEO of OCA.
In an era of increasing government oversight, employers face the following question: Do we need to administer a spending account (HRA, FSA, or DCAP) on a compliant basis?
Employers are either under the belief that their exposure is transferred to their Third-Party Administrator (TPA), or they simply are not aware of the rules required to successfully implement and manage these pre-tax benefit plans.
TPAs hired to “administer these plans on behalf of an employer/sponsor are legally plan service providers” and the responsibility falls to the employer as the legal plan administrator. Most employers or their legal/tax professionals do not have full comprehension of what those rules and penalties for non-compliance are as it is likely the TPA never explained them in detail.
There may be instances where the TPA bends the rules for claim certification to keep their own costs down and because of little government oversight or publicity on the ramifications, TPAs get away with this untruthful act.
“Confusion Now Hath Made His Masterpiece”
Federal regulations governing these plans date back to 1987 and debit card rules were enacted that require ALL card transactions be substantiated. In many cases, the card infrastructure can substantiate the transaction, but the rules do not accommodate all cases.
The fact that some claims auto-adjudicate (approved or denied quickly through technology), and some do not, create a confusing environment for the consumer.
If the debit card transaction does not fall into one of the four boxes of automated adjudication, the plan administrator (the employer) is responsible for following the rules to maintain a compliant plan. Typically, this is transferred to the TPA to handle, but the responsibility never leaves the legal plan administrator for compliance. The rules are clear that there is no exclusion for income without substantiation and all transactions must be substantiated.
If the administrator is not able to acquire the necessary information to adjudicate the claim, the rules provide clear steps that must be taken to control future spending and the temporary deactivation of the debit card until the claim is resolved. The guidance is opaque on how quickly card deactivation must take place and results in a lack of consistent industry practice. For TPAs that deactivate cards (not all do which is an issue in itself), this creates the expense of staffing customer service.
“…That is the Question”
Here are some common questions employees ask and the common sense behind the answers:
Q: I went to the cardiologist, so why do I need to submit any paperwork to substantiate my debit card payment?
A: It is entirely possible you can have an outstanding balance from a prior plan year that you pay for with your spending account card. The card has no way of knowing what the date of service was for, if you are an active participant and have funds available. The transaction goes through even though it may not be eligible.
Q: I went to the dentist and the eye doctor. I purchased a teeth-whitening program and insurance against breaking my glasses. What could I possibly purchase that would not be eligible for my FSA?
A: Again, if the card is being swiped by an eligible participant and has funds available it does not have the ability to sort out eligible from non-eligible expenses at these types of providers. Teeth whitening is considered cosmetic and is not eligible as well as insurance in case you break your glasses under Code Section 105 and Code Section 213(d).
“To Thine Own Self Be True”
Penalties imposed for failure to follow the rules can range from a slap on the hand for corrective action all the way to plan disqualification. In my opinion, failure to universally deactivate cards would cause a plan disqualification as it is a major infraction. Pre-tax spending accounts generate FICA savings to the employer and would have to be repaid along with the associated penalties/interest due to underreporting the income when the employer refiles their tax-return. Employees who pay a state income tax would have to refile both their state and federal returns to repay the underreported income, penalties, and interest.
The audit may be expanded to include additional plan years, which would create additional expenses as it is likely compliance rules were not adhered to in prior plan years.
Given today’s technology to submit or automate receipts for the required backup, it is not hard to follow the rules. The hardest part is communicating the rules and the reasons supporting the need. Imagine a client who wants to report zero income when they made $100,000? The answer is clear, and you would never suggest such a thing nor would most clients want to undertake such a risk knowing the likelihood of an audit. Imagine that same client not following the rules of their cafeteria plan or HRA but having no idea they are not compliant?
Ultimately, it will be up to the employer to decide what path they want to head down. Fortunately for Shakespeare, he never had to worry about that proposition. Unfortunately for the vast majority of cafeteria plan or HRA sponsors, they have no idea what they could be facing if their plan is ever audited before they clean it up.
The secret of life is to educate and communicate clearly and if you can achieve this, you will be successful in your personal and business life.
About the Author
Stephen Honig started his career in employee benefits nearly 40 years ago, and currently serves as CEO of OCA. Through a combination of communication techniques and cutting-edge plan designs, Steve and his team have earned a nationwide reputation for reducing health care costs while at the same time improving the quality of the health care delivered.
Announcing an Integrated Partnership with OCA
Balance Point is pleased to announce an integrated partnership with OCA. Through this relationship, Balance Point provides clients access to a full-service Third Party Administrator.
This integration means data flows seamlessly between our human capital management platform and OCA’s platform, streamlining the process and alleviating the employers’ administrative burden.