IRS encourages debit-card use for FSA payments — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

IRS encourages debit-card use for FSA payments

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Does your company have a flexible spending account (FSA) plan that enables your employees — and you — to use pretax dollars to pay for certain health care or dependent care expenses?

Strategy: Amend your plan to authorize payments by debit or credit card. The IRS just 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 having to go through the hassle of substantiation.

Here’s the whole story: Effective immediately, the IRS has expanded its streamlined process for verifying employee FSA charges to include transactions equaling exact multiples of the specified co-payment, up to five times the amount.

Example: Employee A uses his FSA debit card at a pharmacy to pay for five prescriptions of generic drugs, each carrying a $5 co-pay, for a total of $25. Under the new IRS rules, the employer can verify the employee’s purchase without requiring a receipt because the total amount ($25) equals a multiple of the copay for generic drugs ($5) not exceeding five times the co-pay.

The IRS also now allows employers to implement a system that approves or rejects payment card transactions using vendors’ inventory-control information.

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