WASHINGTON—Internal Revenue Service guidance on using debit cards with flexible spending accounts and health reimbursement arrangements clears up questions that have arisen since the IRS first issued rules for the cards.

Additionally, the guidance, which was published last week, goes beyond debit cards. For example, the guidance makes it clear that employees with FSAs or HRAs can't "self-certify," such as by checking a box on a third-party claims administrator's Web site, that an expense is medically related.

The guidance also makes clear that certain common transactions, such as reimbursement from an FSA or HRA for a copayment made for a doctor's office visit, can be handled, in certain situations, without additional paperwork.

The guidance comes just over three years after the IRS issued groundbreaking debit card rulesgiving the green light for the use of the cards to pay expenses, such as prescription drug and office visit copayments, that are funded through health care FSAs and HRAs.

"This updates the 2003 guidance to address issues that have been ambiguous," said Chris Byrd, an executive vp with Avon, Conn.-based Evolution Benefits Inc., which markets a debit card it calls the Benny Card.

"This will broaden the use of debit cards," said Tim Stanton, a benefits attorney with Ogletree, Deakins, Nash, Smoak & Stewart P.C. in Chicago.

Debit cards are programmed with a value equal to what an employee has agreed to contribute to an FSA, or what an employer will contribute to an HRA.When an employee has a health care expense, such as a copayment on a prescription drug, the debit card is swiped using a standard credit card reader and the copayment is deducted from the employee's account.

That earlier guidance eliminated the need for employees to file health care receipts and forms for the most frequent types of health care expenses eligible for reimbursement. It also freed up claims administrators from having to review the most common types of transactions handled through FSAs and HRAs.

For example, the earlier guidance made clear that if the dollar amount of a health care transaction that is charged to the debit card equals the copayment a health plan imposes, the charge would be considered fully substantiated, the IRS said.Examples of eligible transactions include copayments for physician office visits or prescription drugs filled at a retail or mail-order pharmacy.

The latest guidance expands the type of health care-related transactions charged with a debit card that would be considered fully substantiated, said Scott Sims, general counsel with Hewitt Associates Inc.'s HR outsourcing group in Orlando, Fla.

For example, the earlier guidance didn't make clear if full substantiation would apply if an employee used a debit card when making copayments on several prescriptions purchased at the same time. Such situations are common, such as when a parent fills prescriptions simultaneously for several ill children.

Under the newest guidance, multiple prescriptions could be purchased through a debit card without additional substantiation if, for example, the dollar amount of the total of the copayments equaled an exact multiple of not more than five times the dollar amount of the copayment.

For example, if an employee used a debit card to fill five prescriptions, each with a copayment of $10, the transaction would be considered fully substantiated.

Multiple prescriptions with varying copayments filled simultaneously also are considered fully substantiated if there are exact matches of multiples or combinations of the copayments, up to five times the maximum copayment.

Take the case of an employee in a prescription drug plan in which a $5 copayment is charged for generic drugs and a $10 copayment is imposed for brand name drugs.

Copayment multiples

In an example provided in the IRS guidance, an employee uses a debit card to purchase three generic drug prescriptions and three brand name drug prescriptions for a total debit card transaction of $45.

Because the transaction is an exact match of a combination of the copayments and does not exceed five times the maximum copayment for prescriptions, the transaction would be considered fully substantiated.

"All you have to do is have the card swiped once," said Sharon Cohen, a benefits attorney with Watson Wyatt Worldwide in Arlington, Va.

"This is a simple rule that can be easily followed," said Jon Kessler, chief executive officer ofWageWorks Inc., a San Mateo, Calif.-based debit card provider.

"Auto-substantiation has been significantly enhanced, particularly at the pharmacy," said Andy Anderson, of counsel, in the Chicago office of Morgan, Lewis & Bockius L.L.P.

Moving beyond situations where debit cards are used, the guidance, though, closes the door on so-called self-certification for FSA or HRA reimbursement of medical expenses.Benefit experts said some third-party claims administrators have been promoting approaches in which an employee would self-certify, such as via the Internet or an intranet, that they have incurred health care expenses and are entitled to reimbursement from their FSA or HRA without filing a receipt.

Self-certification of an expense, the IRS says, "does not constitute the required substantiation." In such situations, such as when an employee pays a deductible for a dental service, the employee would have to fill out a form and send in a receipt to the FSA or HRA administrator showing the amount paid.

The penalty for self-certification is severe: All amounts paid from an FSA or HRA would be added to employees' taxable income.

"Some people have been playing fast and loose with the rules. This is welcome news," said Evolution Benefits' Mr. Byrd, referring to the ban on self-certification.