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Substantiation requirements for employee health benefits

Written by: Gabrielle Smith
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Published on April 11, 2022.

Given the rising cost of employer-sponsored group health insurance plans, more employers look to health reimbursement arrangements (HRAs) and health stipends as affordable health benefits solutions.

Through an HRA or health stipend, employers simply offer a monthly allowance for their employees to purchase their own individual health insurance premiums and qualifying medical expenses. After making their purchases, employees submit their expenses to their employer for reimbursement.

In this article, we’ll outline the IRS rules and substantiation requirements for employee health benefits.

What are substantiation requirements?

Substantiation requirements are guidelines established by the IRS that require certain health benefit plans to prove that reimbursements are for eligible medical expenses. This is usually done by providing a receipt or bill.

The IRS established substation requirements for health benefits such as health saving accounts (HSAs) and HRAs.

Differences between HRA and health stipend substantiation

While HRAs and health stipends both reimburse employees for their healthcare expenses, they require you to handle substantiation differently. This section will break down the differences between the two.

Receiving and processing HRA claims

In the context of an HRA, a “claim” is simply a request for reimbursement. An HRA claim begins when an employee submits proof of a qualified expense to their employer or their employer’s HRA software provider, like PeopleKeep.

For a claim to be processed, it needs substantiation. That just means an employee needs to provide proof to show that they incurred an HRA-eligible expense.

Proof of purchase could include the following:

  • A receipt
  • An invoice
  • An explanation of benefits (EOB) statement

Whatever form the proof of purchase takes, it’s only valid if it includes details about the type of service or product, the date of service or sale, and the product or service cost.

Once the employee has submitted proof of the expense, you must either approve or decline the request depending on whether or not the expense is HRA-eligible and if they have provided documentation with the requirements listed above.

Substantiation requirements for health stipends

Because health stipends aren’t a formal health benefit and don’t use tax-free dollars to reimburse employees, there are fewer substantiation requirements and regulations. However, there are still some critical requirements for you to know.

Any eligible expenses that fall under IRS Publication 502 can’t require proof of purchase (such as a receipt or bill), as doing so would change health stipend reimbursement rules. This would subject your health stipend to additional requirements under HIPAA, ERISA, the Affordable Care Act (ACA), and others.

However, there are exceptions to this rule. Some health stipend reimbursement requests need substantiation, such as 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 can help with that.

Paying health reimbursements

If you approve the reimbursement request, it moves onto the next step in the process—paying the reimbursement.

Whether you’re offering an HRA or a health stipend, you can reimburse your employees in any of the following ways:

  • Payroll
  • Direct deposit
  • Check
  • Cash

With an HRA, you’re responsible for paying the claim within the timeframe established in your plan documents. However, HRA claim rules don’t require employers to keep track of whether an employee has minimum essential coverage (MEC) for tax purposes.

Remember—only employees with MEC can receive HRA reimbursements that are free of income and payroll tax. If they forgo MEC, they should list their reimbursements as income at the end of the tax year.

Because your employee is responsible for their own insurance status, you’ll simply reimburse them for all of their eligible expenses tax-free, and they’ll report their reimbursements on their own. All reimbursements paid out for health stipends, on the other hand, will be taxed.

Handling declined reimbursement requests and appeals

If you determine that 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 the additional 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 and follow Department of Labor guidelines and rules under the Employee Retirement Income Security Act (ERISA). It’s important to note that the person appointed to hear the appeal can’t be the same person who declined the original request for reimbursement.

While there aren’t any strict rules for handling declined reimbursements with a health stipend, it’s still a good idea to notify your employees of approved or rejected expenses within a reasonable time frame.

Recording reimbursements and storing documentation

All employers have a legal obligation to keep records about all HRA reimbursements processed and issued throughout the tax year. While there’s no such legal requirement for health stipends, it’s a good idea for employers to keep similar records on hand.

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 seven years.

Conclusion

Navigating HRA and health stipend claim rules can be a thorny task for small business owners, benefits administrators, and HR professionals. While it’s possible to self-administer an HRA or health stipend, businesses must be sure they’re up to 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 a benefits administration software and an award-winning customer support team on your side a necessity. At PeopleKeep, we ensure you maintain compliance with federal law and complex IRS rules while you get a simple, cost-controlled benefit you and your employees can afford.

Contact a personalized benefits advisor today to see how an HRA or health stipend can work for your organization

This blog article was originally published on April 18, 2018. It was last updated on April 11, 2022.

Originally published on April 11, 2022. Last updated April 11, 2022.
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