If you’re an employer who is offering a health reimbursement arrangement (HRA) or a health stipend it’s important to understand the steps your employees need to take to use them—one of which is substantiation.
Through an HRA or health stipend, employers offer their employees a fixed monthly allowance. This allowance can cover the cost of individual health insurance premiums and other qualifying medical expenses. After an employee incurs a health expense, they can submit that expense to their employer for reimbursement, and be reimbursed up to their allowance amount.
As part of this process, the employee will need to substantiate that their expense was eligible for reimbursement—this is required by the IRS.
In this article, we'll outline the IRS rules and substantiation requirements for employee health benefits.
What are substantiation requirements?
The IRS established substantiation requirements for specific pre-tax health benefit plans that employees need to follow to prove that funds from these plans have been used for eligible medical expenses. This is usually done by providing a receipt or bill.
The IRS has substation requirements for health benefits such as health saving accounts (HSAs), flexible spending accounts (FSAs), and HRAs. Each time an employee uses one of these benefits to pay for a premium, product, or service, they may be asked for documentation that illustrates the following:
- The date of service (or purchase)
- A description of the service (or item)
- The name of the provider (or vendor)
- The dollar amount charged
How substantiation works for HRAs
An HRA is used to reimburse employees for their healthcare expenses and has a specific process for handling substantiation. This section will break down that process.
Receiving and processing HRA claims
In the context of an HRA, a “claim” is a request for reimbursement. An HRA claim begins when an employee submits proof of a qualified expense to their employer. They can also submit their expense through an HRA benefits administration software provider, like PeopleKeep.
Proof of purchase could include the following:
- A receipt
- An invoice
- An explanation of benefits (EOB) statement
For the proof to be valid, it must include details about the type of service or product, the date of service or sale, and the product or service cost.
Once the employee submits proof of their expense, you must approve or deny it. To approve the request, the expense must be HRA-eligible and have the correct documentation listed above to support it.
Paying health reimbursements
If you approve the reimbursement request, it moves on to the next step in the process—paying the reimbursement.
With an HRA, you can reimburse your employees in any of the following ways:
- Direct deposit
With an HRA, you're responsible for paying the claim within the timeframe established in your plan documents. Only employees with minimum essential coverage (MEC) can receive HRA reimbursements that are free of income and payroll tax. If they forgo MEC, employers should list their reimbursements as taxable income at the end of the tax year.
Since your employees handle their own insurance status, you only need to reimburse them for their eligible expenses. HRA reimbursements are tax-free, unlike reimbursements from a health stipend.
Handling declined reimbursement requests and appeals
If you determine the expense is ineligible under an HRA, you must notify the employee within 30 days. In some cases, such as if your employee didn't include proper proof of purchase, you might request additional information from the employee to help substantiate the request. In this case, you must give the employee 45 days to provide more information.
Suppose an employee can't provide additional documentation to support the request. In that case, you must follow the appeals process detailed in your plan documents, Department of Labor guidelines, and rules under the Employee Retirement Income Security Act (ERISA). It's important to note the person appointed to hear the appeal can't be the same person who declined the original request for reimbursement.
Recording reimbursements and storing documentation
All employers are legally obligated to keep records about all HRA reimbursements processed and issued throughout the tax year.
These records should include:
- Information on requests received
- Associated documentation
- Whether or not the organization approved or declined reimbursement
The statute of limitations for HRA claims under IRS law is seven years, so it's best practice to hang on to HRA claim documentation for at least that long.
Do health stipends have substantiation requirements?
There are fewer substantiation requirements for health stipends. That's because they aren't a formal health benefit and don't use tax-free dollars to reimburse employees. But there are still some critical requirements for you to know.
Eligible expenses under IRS Publication 502 can't require proof of purchase (such as a receipt or bill). If it did, it would subject your health stipend to more requirements under HIPAA, ERISA, the Affordable Care Act (ACA), and others.
Yet, there are exceptions to this rule. Some health stipend reimbursement requests can require substantiation. This can include evidence of direct primary care network membership fees and health-sharing membership fees.
When setting up a health stipend benefit, you'll need to know when an expense has a substantiation requirement and when one doesn't. Employee stipend administration software, such as WorkPerks by PeopleKeep, can help you keep track of any submitted receipts and your reimbursement amounts.
Navigating substantiation rules can be tricky for small business owners, benefits administrators, and HR professionals.
While it's possible to self-administer an HRA, it's not easy. Employers have to deal with the challenge of substantiation, drafting plan documents, staying on top of employee communication, processing reimbursement requests, storing documentation, and more.
That's what makes having benefits administration software and an award-winning customer support team on your side a necessity. At PeopleKeep, we help you maintain compliance with federal law and complex IRS rules for HRAs. In return, you get a simple, cost-controlled benefit that you and your employees can afford.
This blog article was originally published on April 18, 2018. It was last updated on June 15, 2023.