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July 2006 | Volume V, Issue 7 | Editor: David Wise |
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Updated Guidance Increases Card ConvenienceThe recent IRS ruling on the use of debit cards, credit cards, and stored value cards to reimburse participants in self-insured medical reimbursement plans, such as health Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs), has significantly enhanced one of the cards’ most popular attributes: convenience. The ruling also clarified certain substantiation methods and requirements that apply to all medical reimbursement plans whether or not a card is used. This is good news for Third Party Administrators (TPA) and Plan Service Providers (PSP), as it officially recognizes – and absolutely requires – the role of a third party to substantiate certain expenses. Finally, the ruling provided guidance on the use of cards to reimburse participants in dependent care assistance programs (DCAPs). Some of the main items include:
New Item – Multiple Copay Auto SubstantiationRecognizing that participants often fill more than one prescription at once, the IRS now allows auto substantiation of matching copay amounts up to a multiple of five. Also, if the health plan has different tiered copays for a benefit (such as $5 for generic prescriptions and $10 for brand name prescriptions), the IRS will allow auto substantiation for a multiple of copay amounts – not to exceed five times the maximum copay. If the dollar amount exceeds a multiple of five for a specific transaction, the participant must submit verification of the transaction to a TPA or PSP for substantiation. If the amount of the transaction does not meet any combination of five times a copay or five times the maximum copay (when combinations of copays are used), the participant must submit verification of the transaction to a TPA or PSP for substantiation. The DataPath card solution already accommodates multiple copays, but the copay table must be established manually at the TPA / PSP level. We are currently developing a new algorithm that will automatically establish the copay table. New Item – Copay VerificationThe copayment schedule must be verified by the employer or TPA / PSP ... never by the employee ... and records of verification of these copays will need to be kept. If the TPA / PSP is setting up copays for the participants’ spouse’s plans, they need to be verified as well. New Item – Direct Third Party SubstantiationIf a TPA / PSP receives an Explanation of Benefits (EOB) directly from an insurance carrier, the claim is fully substantiated and the employee is not required to submit any verification of the expense. New Item – Inventory Information Approval System (IIAS)The IRS has significantly expanded card potential by permitting the use of a card at a merchant that does not use the health care-related Merchant Category Codes (MCC). If at the point of sale (POS), the items can be identified as eligible by an inventory item number, such as Stock Keeping Units (SKU) or UPC Codes, the transaction can be processed and autosubstantiated. Any items purchased that are not identified as eligible by the merchant will need to be purchased by a different method of payment (otherwise known as “split tender transactions”). Of course, the IIAS requires that the merchant make the claims level detail available. DataPath already has established relationships with both Walgreens and drugstore.com – the two most prominent utilizers of IIAS – and is currently working out the details to acquire their data feeds. New Item – Record Keeping for POS ItemsEffective 1/1/07, employers must retain records that the cards were used for eligible medical expenses only. The employer will need to produce these records if audited by the IRS. Clarification of Existing Rule – No Self SubstantiationIn a move that officially recognizes– and absolutely requires – the role of the TPA / PSP, the IRS reinforced an existing rule that “Self Substantiation” or “Self Certification” of an expense by an employee / participant does not meet the substantiation requirement rules. If an employee submits a claim form for a certified expense but does not submit an independent third party receipt verifying the expenses, all amounts paid under a plan that permits self substantiation are included in gross income, even those where the claim has been substantiated. This applies to paper claims or electronic payment card transactions. New Item – Use of Cards for DCAPWhile the new guidance permits the use of a payment card with a DCAP, the ruling was clear to point out that DCAP expenses cannot be reimbursed before the expenses are incurred. “Incurred” means when the dependent care services are provided, not when the expenses is formally billed for, charged for, or paid for by the participant. Once an initial transaction has been substantiated, the employee may use a debit card to make payments to the same provider for subsequent dependent care expenses, but only in amounts equal to the less of the previously incurred expense or the participant’s total salary reduction amount to date, without need for further substantiation. Learn MoreDataPath, Inc., is currently in the process of reviewing Notice 2006-69 and discussing the details with our legal representatives at Alston & Bird. We will release our official response at Connections ’06, our Annual Conference. For more information on this business-building conference for benefits professionals, please visit www.dpath.com/connection06. | |
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