What Happens If I Don’t Submit Receipts for FSA?

Flexible Spending Accounts (FSAs) allow individuals to set aside pre-tax money from their paycheck to cover eligible healthcare or dependent care expenses. This reduces taxable income, providing a way to save on out-of-pocket costs. FSAs help budget for anticipated medical or care needs, making healthcare more manageable.

Understanding FSA Receipt Requirements

FSA participants must substantiate all distributions from their accounts to ensure they are used for qualified medical or dependent care expenses. The Internal Revenue Service (IRS) mandates this substantiation to uphold the tax-advantaged status of these funds, as outlined in publications like IRS Publication 502 and Internal Revenue Code Section 105.

FSA administrators verify expenses, reviewing claims and requiring valid receipts to confirm funds were used appropriately per IRS guidelines. A valid receipt typically includes:
The merchant’s name
The date of service or purchase
A detailed description of the item or service
The total amount paid
For example, a doctor’s visit receipt needs the provider’s name, date, service, and payment.

Common expenses requiring receipts include doctor visits, prescription medications, dental procedures, and vision care. Over-the-counter medications and certain medical supplies purchased with an FSA debit card also often require a receipt. This documentation ensures compliance and effective FSA management.

Immediate Consequences of Unsubstantiated Expenses

If an FSA claim lacks proper substantiation or documentation is insufficient, the FSA administrator initiates a process. They typically send a communication, often via mail or email, requesting additional information or a valid receipt. This request usually specifies a 30 to 90-day deadline for submission. Failure to respond can lead to further action.

If necessary receipts are not provided by the deadline, or if the expense is unqualified, the claim will be denied. If funds were already received via reimbursement or FSA debit card, the employee must repay the amount to the FSA plan. Repayment can occur through direct payment, an offset against future claims, or payroll deductions.

Not repaying an unsubstantiated amount can result in it being treated as taxable income. If the employee fails to repay, the FSA administrator is legally obligated to report this amount to the IRS. This reported amount will be included in the employee’s taxable wages on their W-2 form. The employee loses the tax benefit, as it becomes subject to federal, state, and local income taxes. The IRS may also assess penalties.

Resolving Unsubstantiated Claims

Once an expense is deemed unsubstantiated by the FSA administrator, immediate action is necessary. The most direct resolution is providing the missing receipt or adequate documentation as requested. Most administrators provide a 60 to 90-day window from the initial request for individuals to submit proof of purchase or service. Prompt submission of a valid receipt typically clears the outstanding claim.

If the original receipt is lost or unavailable, alternative documentation may be acceptable. An Explanation of Benefits (EOB) from an insurance company often serves as valid proof for medical expenses. Itemized statements from healthcare providers or pharmacies are also accepted, provided they contain all necessary information. Credit card receipts are typically not sufficient on their own.

If acceptable documentation cannot be provided, or if the expense is unqualified, repaying the unsubstantiated amount to the FSA plan is required. Employees can repay funds via personal check, direct payment through the administrator’s portal, or payroll deduction. This repayment prevents the amount from being reported as taxable income to the IRS, thus preserving the FSA’s tax-advantaged status and avoiding tax liabilities.

Direct communication with the FSA plan administrator is recommended when an expense is flagged as unsubstantiated. Each plan may have specific policies, deadlines, and resolution methods. Contacting the administrator helps individuals understand requirements and explore options, ensuring compliance and preventing adverse tax consequences.