If your organization offers a flexible spending account (FSA) plan to employees, consider amending it to authorize payments by debit or credit card. The IRS recently issued new guidance that makes it easier for employers to track and verify employees' FSA transactions. (IRS notice 2006-69)
Why do it? Using payment cards cuts down on paperwork. Employees are reimbursed immediately without going through the hassle of substantiation.
How it works: The IRS has expanded its streamlined process for verifying employee FSA changes to include transactions equaling exact multiples of the specific co-payment up to five times the amount. Example: Employee A uses an FSA debit card at a pharmacy to pay for five generic drug prescriptions, each carrying a $5 co-pay—for a total of $25.
Under the new rules, the employer can verify the employee's purchase without requiring a receipt because the total amount ($25) equals a multiple of the co-pay for generic drugs ($5) not exceeding five times the co-pay.
The IRS also now allows employers to use a system that approves or rejects payment card transactions using vendors' inventory-control information.
Finally, the IRS has made it easier to use a credit or debit card to pay dependent-care expenses through an FSA.
Tip: The guidelines also apply to health reimbursement arrangements (HRAs). Read the IRS Notice at www.irs.gov/irb/2006-31_IRB/ar10.html.