On June 25, 2021, the Internal Revenue Service (IRS) released three informational letters relating to health flexible spending accounts (FSAs) inquiries. One letter addressed substantiation requirements for FSA debit cards. The other two answered questions on the post-termination use of FSAs.

The IRS sent informational letter 2021-0013 in response to employer questions sent on August 8 and October 26, 2020, about substantiating medical expenses paid by an FSA debit card.

The informational letter, dated April 27, 2021, explains that a participant’s qualified medical expenses (QMEs) paid or reimbursed from their FSA are tax-exempt. The letter further details that an independent third party must substantiate any QMEs paid or reimbursed from a participant’s FSA. Substantiation for a QME includes providing:

  • The date of service or sale of the product, and
  • The amount of the expense.

For a QME to be deemed properly reimbursed by a member’s FSA, an independent third party must provide the FSA plan sponsor with a statement substantiating the QME. That statement can either occur automatically at the point of sale or after the transaction.

QMEs reimbursed with an FSA debit card must adhere to the proposed Treasury Regulations Section 1.125-6 special substantiation rules.

The FSA debit card rules account for the information provided by debit card transactions to the plan. When a debit card transaction gives the required information, substantiation occurs automatically or as a real-time substantiation. The rules also permit an FSA plan sponsor to coordinate with the participant’s health plan to use the information provided in an explanation of benefits (EOB) to substantiate a debit card charge without requiring more information. Further, the debit card rules allow automatic substantiation when a plan approves a recurring QME payment incurred at certain providers that match the amount, medical care provider and time period of previously approved QMEs. These rules permit an FSA plan to substantiate the transaction without the need for additional review or documentation, allowing participants to use their debit cards at the point of sale for QMEs like other debit card payments. However, an employer’s FSA plan may impose stricter substantiation standards than the rules allow, resulting in a QME payment being substantiated after the transaction occurs. This substantiation results in a participant’s debit card transaction not being approved at the point of sale. The IRS letter directs FSA plan participants to contact their employer or plan administrator to ask about the availability of chip-enabled cards and contactless payment options and the documentation the plan requires for substantiation.

IRS informational letters 2021-0004 and 2021-0005 address how the use-it-or-lose-it rule and the Consolidated Omnibus Budget Reconciliation Act (COBRA) relate to post-termination FSA use.

The letters provide general guidance on the interaction of the use-it-or-lose-it rule, COBRA continuation coverage, and the allowable FSA plan amendments described in IRS Notice 2021-15. In both letters, the IRS stated that the rules only require plans to offer COBRA continuation under certain circumstances. A plan must offer COBRA if a participant experiences a qualifying event and they still have reimbursable funds remaining in their FSA. Meaning that as of the date of the qualifying event, the amount the participant may receive as reimbursement from their FSA for the remainder of the plan year exceeds the amount they must pay for COBRA for the rest of that plan year. Letter 2021-0004 further discusses the amount available to a participant that elects COBRA continuation coverage post-termination. According to the letter, the amount available to a participant following termination is:

  • The carryover amount plus the amount of the FSA contribution elected for the plan year, minus
  • The amount the plan has reimbursed the participant as of the date of their qualifying event.

The individual’s amount to pay for FSA COBRA continuation does not include any previous-year carryover amount, including the permissible full carryover of 2020 or 2021 unused funds into 2021 or 2022 plan years. Plan can require participants to pay the following for COBRA coverage:

  • The amount of the FSA contribution elected for the plan year, minus
  • The amount contributed to the FSA as of the date of the qualifying event.

Informational letter 2021-0005 states that a COBRA-qualified beneficiary may generally elect COBRA and continue participating in their FSA until the end of the plan year. At the end of the plan year, a participant would forfeit any unused FSA dollars under the use-it-or-lose-it rule. The letter explains that the plan year includes any run-out or grace periods.

The IRS released the letters as general guidance for employers, plan sponsors and plan participants. The letters stated that the details of a specific situation will rely on the governing FSA plan documents and whether the plan adopted certain allowable plan provisions, including run-out periods, carryovers and grace periods, as well as the extended period described in Notice 2021-15.


EPIC offers this material for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this document and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.


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Kevin Mathis

Compliance Manager – Atlanta, GA