Improper Payment Process

What is an Improper Payment?

The IRS defines Improper Payments as any of the following:

  • Ineligible Expenses: Examples include cosmetic procedures, expenses incurred outside of the plan year,  prepayments for goods or services, or any other expense not eligible for reimbursement under the Plan rules.
  • Expenses requiring documentation for which no documentation is provided. For example, an employee has a hospital bill for $901.23 that requires a receipt because it is not equal to a co-pay amount. If the receipt is not provided by the employee within a reasonable period of time (35 days) the expense is deemed an “Improper Payment”.

What is a Repayment Due?

Improper Payments from an FSA create what 24HourFlex calls a “repayment due”. A repayment due can be paid online by employees from a checking/savings account or can be repaid by sending a check to 24HourFlex.

Memorandum 201413006, issued by the IRS Office of Chief Counsel, clarified the IRS expectations about how employers should handle Improper Payments. This memorandum provided helpful guidance for employers and third party administrators which serve as the basis for the process outlined below.

How are Repayments Due Handled by 24HourFlex?

1) 24HourFlex will send email or written notification when a repayment due has been created on an employee’s account. This communication will explain why the repayment due was created and provide details on how the employee can repay the expense.

2) An employee will have 15 days to repay the expense from the point the repayment due is created.

3) If the expense is not repaid within the 15 days communication is sent to the employee reminding them that the expense must be repaid immediately and that their employer may withhold the amount from their paycheck if they do not take further action.

4) If the expense is still not repaid 24HourFlex will contact the employer and provide the employee’s information and the repayment amount so the employer may withhold the expense from the employee’s next paycheck. This will typically occur within 30 days of the repayment due being created.

Improper Payment Correction Steps

Deny Access to Employee’s Card
Require Repayment by Employee to FSA
Offset a Valid Claim to Repay Improper Expense
Withold Improper Payment Amount from Employee’s Pay
Treat as Business Indebtedness and Issue W2 to Employee

Detailed Improper Payment Correction Steps

Denny Access

The employee’s 24HourFlex Benny card will be suspended until the improper payment is repaid (this can be done online from a checking/savings account or by sending a check to 24HourFlex). This card suspension ensures that additional improper payments are not made by the employee.

During this period, the employee may request reimbursement for expenses through the manual claims process online, utilizing the 24HourFlex Mobile app, or by submitting a manual paper claim.

Require Repayment

An employee with an improper FSA reimbursement must repay those funds into their account.

Once they have repaid the amount the employee’s card will automatically be re-activated (the following business day) and those funds can be used on other eligible plan year expenses.

Offset Claims

If an employee has an improper expense that has not been repaid and they submit another valid claim for reimbursement those funds should be used to offset the improper expense.

For example, if an employee has an improper payment of $100 and they submit a different valid claim for $150 they would only receive a check for $50 ($150 – $100 improper payment).

Withhold from Pay

If the employee does not repay the improper FSA payment the employer should withhold the amount from the employee’s paycheck, to the full extent allowed by applicable law.

24HourFlex will provide employers with a list of employees who have Repayments Due in order to facilitate this step in the process. The goal is for employee’s to repay the Improper Payments but if that does not occur within a reasonable period of time the employer will need to withhold the amount from the employee’s pay.

Issue W2

If all of the previous steps have failed to collect the improper payment from an employee the employer must treat the expense as they do any other business indebtedness.

Additionally, the employer must report the outstanding improper payment as wages on the employee’s Form W-2 to the extent the employer forgives the indebtedness. The improper payment is reportable for the taxable year in which the debit is forgiven and the amount included in income subject to income tax withholding, FICA, and FUTA.