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IRS Says Third-Party Substantiation Required for Cafeteria Plan Medical and Dependent Care Expense,

IRS Says Third-Party Substantiation Required for Cafeteria Plan Medical and Dependent Care Expense, Rejects Employee Self-Certification


The IRS Office of Chief Counsel recently issued guidance on the taxability of unsubstantiated health FSA expenses and whether self-certification of expense reimbursement eligibility satisfies the substantiation requirements under the proposed cafeteria plan regulations. The guidance concluded that health FSA medical expenses and dependent care expenses are included in gross income if the expense reimbursement is not fully substantiated, including any expenses below a dollar threshold established by the plan. The IRS further rejected self-certification of employee expenses, even for small dollar amounts, and indicated that if a plan does not require independent third-party substantiation of medical of dependent care expense reimbursements, the plan fails to operate in accordance with Prop. Reg. § 1.125–6(b) and is not a cafeteria plan within the meaning of Section 125 of the Code.


Plan Sponsors are encouraged to review their cafeteria plan reimbursement requirements to ensure that independent third-party substantiation is used for all medical and dependent care expense reimbursements.


Contact your Boutwell Fay attorney for more information about this topic or email us at attorneys@boutwellfay.com.


Office of the Chief Counsel Internal Revenue Service Memorandum Number 202317020
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