June 07, 2023

The memorandum outlines scenarios with different approaches to substantiating claims. The IRS first describes a comprehensive approach that complies with the respective Code requirements where a plan applies substantiation requirements such as requiring information from a third-party independent of an employee and their spouse or dependents and requiring third party-supplied information to include key information describing the service or product, date. The IRS then describes other scenarios where a plan would fail to satisfy the Code’s substantiation requirements requiring that the medical expenses be included in an employee’s gross income and taxable wages. These include:

• If the plan relies on employees’ self-certification of expenses;
• If the plan substantiates only a sampling of some expenses;
• If the plan requires claims amounts over a certain level (i.e., de minimis amounts) to be substantiated; and
• If charges from favored providers are not required to be substantiated.

The memorandum also addresses whether a plan may allow reimbursement of dependent care FSA expenses before the expenses are incurred, concluding that prospective reimbursement fails to satisfy the Code’s substantiation requirements under §§125 and 129 and thus must be incldued in an employee’s gross income and taxable wages.

The memorandum also addresses whether a plan may allow reimbursement of dependent care FSA expenses before the expenses are incurred, concluding that prospective reimbursement fails to satisfy the Code’s substantiation requirements under §§125 and 129 and thus must be incldued in an employee’s gross income and taxable wages.

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