On April 28, 2023, the Internal Revenue Service’s (IRS) Office of Chief Counsel released Chief Counsel Advice Memorandum 202317020 (CCA Memo) with a crucial reminder for employers. The note is of particular importance for employers who offer health and dependent care flexible spending arrangements (FSAs) under an Internal Revenue Code (Code) Section 125 cafeteria plan. The IRS stresses the potential loss of tax-free status for benefits provided under the Code Section 125 cafeteria plan due to a failure in adequately substantiating FSA expenses before reimbursement.
The reminder has been made to ensure that employers understand the potential risk of disqualification that could occur if they fail to appropriately keep track of and validate FSA expenditures pre-reimbursement. This stipulation is part of the IRS’s efforts to maintain the administrative integrity of Flexible Spending Account provisions detailed in Internal Revenue Code Section 125, which are designed to provide workers with tax-effective ways to pay for specific types of expenses that are not covered by other forms of insurance.
The memorandum further emphasizes the importance of regular audits, not just for maintaining company-wide financial transparency, but also to ensure compliance with regulatory requirements of FSA management.
The continued rigorous enforcement and increased focus on appropriate tracking and substantiation of FSA expenses serve as a crucial reminder to all employers offering those benefits, which includes some of the world’s largest corporations and law firms.
This information was shared by Bass, Berry & Sims PLC, a reputable law firm known for providing up-to-date and crucial legal insights and updates for companies around the globe.