Unsubstantiated Health Debit Card Transactions

IRS rules require all health debit card transactions to be substantiated. In some cases, participants will be required to send in the documentation for a debit card swipe after it occurs.

Outstanding Transactions 

Documentation requests are sent to the participant(s) via email (if we have an email address on file) or U.S. mail. Documentation is requested from the participant(s):

  • When the debit transaction occurs.
  • 30 days after initial request with no response.
  • 60 days after initial request with no response.
  • 90 days after initial request with no response. At this time the debit card is suspended.

At this point, employees(s) must send in receipts to verify eligibility of the transaction or repay the amount of the transaction(s). If they choose repayment and the plan year has not ended, these funds will be added to their available balance. If the plan year has ended, they forfeit the repaid amount unless your plan design includes a carryover feature.

For a sample communication to send to employees with unsubstantiated transactions, click here.

IRS Direction

IRS has certain correction procedures for debit card transactions that are not properly substantiated:

  • Notify participant that the debit card swipe needs to be substantiated (Alerus does).
  • Disable use of debit card if proper documentation is not provided by deadline (Alerus does).
  • Offset the debit card swipe amount against future claims (Alerus does).
  • Request repayment of unsubstantiated debit card swipe (Alerus does).
  • Withhold debit card swipe amount from wages (Employer). See your state laws for requirements. The state of MN requires an employee to authorize in writing that it is okay to withhold from wages.
  • If none of the previous steps result in substantiation or repayment, treat the amount of the debit card swipe as regular business debt, and take actions consistent with such designation (Employer).
  • If the business debt is not recovered, forgive the debt, and report it as wages on Form W-2 in the year in which the debt is forgiven regardless of whether the employee is current or former (Employer).
  • Withhold income and employment taxes with respect to forgiven debt (Employer)If the expense is reported as wages on Form W-2 please let Alerus know so we can take necessary steps to update the swipe(s) to reflect Form W-2 reporting.

Former Employee Transactions

If the participant is no longer with your company, you can still make the necessary correction to the employee’s Form W-2 regardless of when the debit card transaction physically happened. When you, the employer, decide to forgive or forgo the collection of the debt, that is when you need to make the correction to the employee’s Form W-2.