Why Are My FSA Purchases Being Challenged?
During your last visit to the doctor or dentist, you used your FSA card for the co-pay or services rendered. You know you have money in your FSA account, and the transaction goes through at your provider without a hitch. But then, a few weeks later you get a message from your FSA Administrator asking you to prove that the treatment you received was an eligible expense. You know that you went to a provider that is clearly FSA eligible, so why the challenge?
It’s All About the “Pre-Tax” Benefit
As FSA management has become more sophisticated, the rules around being a “pre-tax” account have become more explicit for verifying eligibility. In exchange for allowing you to avoid paying taxes on your FSA funds, the IRS requires categorical confirmation.
FSA Cards and the IIAS
The Inventory Information Approval System (IIAS) – a super computer that helps “substantiate” FSA-eligible purchases – has made this process both easier and harder. At the point-of-sale the system has the ability to verify that the merchandise being purchased with an FSA/HRA card is an eligible medical expense, as defined by the IRS. We love the convenience of being able to use the funds in our FSA account with the swipe of a card, but this system and its preciseness is only as good as those merchants that use this system.
The IRS recognizes that most drug stores/pharmacies are highly specialized, selling primarily prescriptions/Rx and other qualified medical goods and services. Thus, the IRS established the 90% Rule as an exception to the IIAS requirement. Those likely to qualify are locations where prescriptions are the primary business of the pharmacy. You can check online if your merchant is supported by the IIAS.
See more: FSA Eligible Expenses Cheat Sheet (PDF)
What Purchase Information Gets Collected?
When you use your FSA Card, the information sent to the FSA Administrator is generally limited to the date of transaction, merchant name and amount of purchase.
The system does not share WHO received that service or WHAT type of service was provided. That is why just a receipt of payment is not enough to corroborate with your FSA Administrator. Also in play is that Administrators are restricted from obtaining additional information about the service provided to you due to HIPAA privacy rules. Health care providers cannot share the details of your treatment.
Keep in mind that dual-purpose items that have both a medical purpose and a personal or cosmetic general purpose are not permitted to identify as an eligible item under IIAS. Examples would be dietary supplements and vitamins. You must have a doctor’s order to approve these items and submit the sales receipts for FSA/HRA approval. You can check online to see if your item is an eligible product.
How to Reduce the Challenges of “Substantiation”
To make the substantiation process less of a headache know these guidelines:
Dental and vision will need substantiation. Most providers are flagged for additional information because they offer not only eligible expenses, but ineligible FSA items as well, like cosmetic reconstruction. An Explanation of Benefit (EOB) form can help clarify services, but those are not provided to your FSA Administrator. Even though most of your items from these facilities will be covered, they need to be authenticated.
First requests of service. You go continually to a Chiropractor or Physical Therapy (PT) and your first visit is flagged for substantiation. You continue to go to PT but the follow-up services are not questioned for validation. How come? It is because a recurring eligible expense for the same amount from the same business that is identical to the first is just that: identical. But, do not ignore that first request to turn in documentation. Those subsequent transactions are accepted based on that original record getting FSA approval.
Ask for the invoice up front. A majority of the time all the FSA Administrator needs to fulfill their substantiation request is the service provider’s invoice that outlines who received the service and what the service entailed. Keep in mind that most providers know FSA rules, so these requests are not a big deal to them. In general, you can get it before you leave their facility.
Separate purchase receipts. Some items won’t require substantiation because of where you bought them. A pharmacy typically has 90% of their merchandise listed through the IIAS, so you will almost never need to provide additional information for approval. But, if you are buying it from a store that sells lots of other ineligible products, isolate those FSA items from your other purchases and buy them separately. You will most likely be required to prove your purchase but it will be much easier if you have them on a separate receipt. And, if it is for over-the-counter medicine with an active medical ingredient, you will be required to provide a doctor’s prescription to be eligible for reimbursement under pre-tax FSA rules.
Bottom Line: Don’t Shoot the Messenger
Substantiation requests aren’t the result of someone’s mistake (yours or your provider’s) – they’re the result of complex tax and privacy laws. FSA Administrators must follow government rulings to stay in business. Go online to your FSA account often and check out messages and review claim status. Make sure that you turn in substantiation requests promptly, otherwise you risk having your card suspended.