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Third party health plan claim validation

by Tony Novak, CPA, MBA, MT
, revised 5/12/2012

Federal tax law allows a business deduction for payments that an employer makes toward an employee's medical expenses*. Most employers use a health insurance plan to handle the financial transactions of a health plan but a growing number make these payments directly to the employees or the medical service providers without insurance. Generally these payments can pay for or reimburse the employee for any qualified health care expense that is not already covered by a health insurance plan.

The payments are not considered income to the employees as long as the employer verifies the validity of the claims.

Unfortunately, this is where the law becomes difficult for employers. While federal tax law requires employers to review the details of employees’ health plan claims, another federal law commonly known as “HIPAA” expressly prohibit employers from prying into employee medical data. Even accidental knowledge of an employee’s medical details can create significant potential liability in the event of any subsequent employment conflict. Treasury Department officials addressed the legal conflict last year by adaptation of a concept known as “third party claim validation”.

Third party claim validation means that an accountant who is unaffiliated with the employer’s management team audits the health plan claims and then issues an independent written statement that can be relied on by the company' s management and the IRS.

The audit procedures used for third party claim validation vary widely between accountants but the basic steps include: 1) substantiation of transactions, 2) verification of deductibility of expenses as listed in IRS Publication 502, 3) verification that claims are not covered by another benefit plan, 4) pairing claims with available benefits under the employer health plan, 5) preparation of a written report summarizing the findings without disclosing employees’ personal medical details. Additional examination procedures are necessary when employees have access to funds through a bank debit card or other similar means.

The review does not need to be completed by a Certified Public Accountant. In fact, most of these services are performed by employee benefits consultants as part of their administrative service.

Keep in mind that this procedure does not apply to health plan expenses paid through an insurance plan, since the insurance company already reviews these claims.

* limits apply. Generally, self-employed individuals are excluded. Dollar amounts are limited starting in 2013.

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