Last updated: November 2026.
A financial management services agency, or FMS agency, is the entity between a Medicaid participant who directs their own services and the state Medicaid agency. It runs payroll and employment taxes for the participant's workers and, where participants hold budget authority, keeps a separate account for each participant's budget, pays approved invoices and reports spending. This page is for organizations preparing to become one. Integral Healthcare Solutions (IHS) drafts the policy set, the evidence file and a mock readiness review. Your organization approves them and handles all money, tax filings and state contact.
What does an FMS agency do under federal Medicaid rules?
A participant may have authority to recruit, hire, train and supervise their workers (employer authority) and authority over how budget funds are spent (budget authority) (CMS training deck on FMS in 1915(c) waivers, opened 2026-11-06). In a 1915(c) waiver that offers self-direction, CMS says the FMS acts as a fiscal intermediary for the participant, and that 1915(c) authority prohibits states from paying participants directly.
Where participants have employer authority, the FMS collects timesheets and processes payroll and employment taxes. Where they have budget authority, it adds a separate account for each participant's budget, tracking and reporting of balances, payment of invoices approved in the service plan, and periodic reports. Where the waiver specifies them, the FMS may perform additional functions for budget authority.
| Authority | Where the FMS text sits | What it says |
|---|---|---|
| 1915(c) waiver | CMS training deck | FMS is the fiscal intermediary; duties follow employer and budget authority; where the waiver specifies them, an FMS may perform additional functions for budget authority. |
| 1915(i) State plan HCBS | 42 CFR 441.740(e)(2) | A state that elects to offer self-directed State plan HCBS must offer financial management supports, including managing employer-side tax and insurance requirements when the individual functions as employer, and separate accounts with periodic reports against budget. |
| 1915(j) self-directed personal assistance | 42 CFR 441.484 | A state may use a reporting or subagent through its fiscal intermediary or a vendor organization, each in accordance with section 3504 of the Internal Revenue Code, must oversee the entity, and is reimbursed at the administrative rate of 50 percent. Participants using the cash option who perform the functions directly are excepted. |
| 1915(k) Community First Choice | 42 CFR 441.545(b)(1) | In the self-directed model with a service budget, a state must make financial management activities available to all individuals with a service budget, and may perform them internally or use a vendor organization that has the capabilities to perform the required tasks in accordance with all applicable IRS requirements. |
This page does not cover section 1115 demonstrations. Where private entities furnish financial management services under 1915(j), the procurement method must meet 2 CFR 200.317 through 200.327 (42 CFR 441.484(a)(2)).
How do states pay for and choose FMS entities?
CMS says states fund FMS as a waiver service or as an administrative activity, and the choice changes federal reimbursement, procurement and participant choice.
| Waiver service | Administrative activity | |
|---|---|---|
| Federal reimbursement | The state's Federal Medical Assistance Percentage | Administrative rate of 50 percent |
| Who may provide it | Any qualified FMS entity | The state procures directly and may limit the entities |
| Participant choice | Free choice among qualified entities | Choice among the entities the state selects |
Among active 1915(c) waiver programs, 94 of 150 (62.6 percent) provided FMS as an administrative activity and 56 of 150 (37.3 percent) as a waiver service. CMS dates those counts June 30, 2020; the slides give no newer figure.
How do you become an FMS agency in your state?
Entry is a state step, and the five states we read use five routes. This is a map of the spread, not your state's rule. Verify current requirements with your state.
| State | Route | What the page we read says |
|---|---|---|
| Colorado | Competitive procurement | A January 2024 state memo (HCPF IM 24-003) reports an RFP award for five years starting July 1, 2024, under the Fiscal/Employer Agent model. The memo expired January 22, 2025. |
| Louisiana | Certification after a readiness review | The state rule (LAC 50:XXI Chapter 11, September 2023 compilation) says all F/EAs providing financial management services under its home and community-based services waivers must be certified through completion of a readiness review by the state health department, and operating without certification is unlawful. The agency must also sign a performance agreement and enroll with Louisiana Medicaid. It must keep documented evidence of an available line of credit of at least one million dollars, or a cash reserve sufficient to cover two payroll cycles. |
| Texas | Noncompetitive open enrollment | The HHSC page says applications are accepted year-round with no deadline, applicants must be enrolled in Texas Medicaid, and contract applications are not processed until the applicant completes required training and passes a knowledge test. |
| Iowa | Medicaid provider enrollment | An Iowa HHS presentation dated July 21, 2026 on the self-direction option says the FMS will enroll as a Medicaid provider and pay the service providers and employees. Its duty list includes background checks, five years of records, a current policy and procedures manual, a business continuity plan and an annual independent audit. It is a presentation, not rule text. |
| Utah | Provider qualifications in a waiver attachment | The New Choices Waiver FMS attachment (footer version 2016-07 V1.0) requires a Certified Public Accountant, an enrolled Medicaid provider and a current business license, among other items. It says the Provider Manual controls if the two conflict. |
Does an FMS agency need IRS approval to run payroll?
The sources we read do not state one rule for every state. Texas says its FMS agencies are registered with the IRS as vendor fiscal/employer agents for people who hire their own employees, and Form 2678 is how an employer asks the IRS to approve an agent. The IRS instructions for Form 2678 (revision 12/2024) say the form is used to request approval for an agent to file returns and make deposits or payments of taxes including FICA and income tax withholding. Processing generally takes 30 days from receipt, and until approval the agent is not liable for filing or deposits. For federal unemployment tax, employers generally cannot appoint an agent, but an employer who receives home care service may ask the IRS to approve one, and the agent must also be appointed for FICA and income tax withholding. All agents, employers and payers remain liable while the appointment is in effect. Your organization makes the filing with its tax adviser; IHS does not.
Who needs this and what triggers it?
The sources we read show two triggers.
- A state solicits FMS vendors, as Colorado did.
- A state offers a certification or enrollment route, as Louisiana, Texas and Iowa do.
How IHS helps
FMS agency readiness belongs to the program development practice line. Thomas G. Goddard, JD, PhD, founder of IHS and former URAC Chief Operating Officer and General Counsel, leads the engagement.
What IHS drafts
- A gap assessment against the state text you obtain and the federal functions above.
- The policy and procedure set, including the timesheet-to-payroll workflow, invoice-to-payment workflow, budget tracking and variance reports, worker screening, complaint handling and a continuity plan.
- An evidence map tying each requirement to a document you hold.
- A mock readiness review with findings and corrections.
What you supply
You supply governing documents, payroll systems, staffing, insurance and financial records, the state's instructions and sign-off on every policy.
The real limit
IHS drafts operating documents. IHS does not run payroll, move money, file tax returns or provide legal advice. IHS does not decide whether a state certifies, enrolls or selects your agency, and does not submit your materials or contact the state for you.
What to have ready
This checklist follows the federal functions above; your state's text comes on top.
- The authority your state program runs under (1915(c), (i), (j), (k) or a demonstration) and whether it funds FMS as a waiver service or an administrative activity.
- The state's current FMS solicitation, certification or enrollment instructions.
- Payroll procedures covering timesheets, withholding, filing and payment of employment taxes and insurance (42 CFR 441.484(c)(1)-(2)).
- A separate-account procedure for each participant's budget, with tracking and reporting of disbursements and balances (42 CFR 441.484(c)(3)-(4)).
- Periodic expenditure reports for participants (42 CFR 441.484(c)(6)).
- Owner or governing-body approval of the written policies, as Louisiana requires.
- Documented financial capacity in the form your state requires.
- A business continuity plan and a complaint reporting process.
- Your plan for the IRS agent appointment and any audit or accountant your state requires.
To compare your documents with this list, schedule the free introductory call.
How does it compare?
- The state performs the functions. A state that does not use a financial management entity must perform the 1915(j) functions for participants, except those using the cash option who perform them directly.
- Direct services: Texas says its FMS agencies do not deliver direct in-home or community-based services.
- Related work: electronic visit verification is on our EVV compliance page, HCBS settings on our HCBS settings page and Medicaid enrollment on our enrollment page.
What does it cost?
None of the federal pages we read states a fee for becoming an FMS agency. On state costs, Texas sets the fee an agency must accept as payment in full for services delivered, and Louisiana requires the line of credit or cash reserve above. Verify current fees and requirements with your state. IHS scopes each engagement after a free introductory call.
What this is not
- It is not legal advice. IHS is a consulting firm, not a law firm.
- It is not a payroll, tax or accounting service.
- It is not a guarantee that a state will certify, enroll or select your agency.
- It is not liaison work. IHS does not submit to the state or contact it for you.
Frequently asked questions
What does a financial management services agency do?
It acts as the fiscal intermediary for a Medicaid participant who directs their own services. Under the 1915(j) rule, 42 CFR 441.484(c), the functions include processing timesheets, payroll and employment taxes, keeping a separate account for each participant's budget, tracking balances, paying approved invoices and sending periodic reports. The list is "including, but not limited to."
How do states choose FMS entities?
It depends on how the state funds FMS. For a waiver service, CMS says any qualified entity may provide it and participants have free choice among them. For an administrative activity, the state procures directly and may limit the entities.
Is FMS a waiver service or an administrative activity?
Either, by state. Among active 1915(c) waiver programs, 94 of 150 (62.6 percent) used an administrative activity and 56 of 150 (37.3 percent) a waiver service, as of June 30, 2020.
Which federal authorities allow self-direction?
CMS lists 1915(c), (i), (j), (k) and section 1115. FMS text is in 42 CFR 441.740(e), 441.484 and 441.545(b)(1) for 1915(i), (j) and (k).
Do I need IRS approval to run payroll for participants?
The sources we read do not state one rule for every state. Texas says its FMS agencies are registered with the IRS as vendor fiscal/employer agents. The Form 2678 instructions describe how an employer asks the IRS to approve an agent for FICA and income tax withholding; processing generally takes 30 days.
What policies does a state expect from an FMS agency?
It depends on the state. Louisiana requires written policies, approved by the owner or governing body, covering at a minimum subjects such as confidentiality, personnel, grievances, emergency preparedness and reporting suspected abuse or fraud.
How much capital does an FMS agency need?
Louisiana's rule requires evidence of an available line of credit of at least one million dollars, or a cash reserve sufficient to cover the cost of two payroll cycles. Verify with your state.
What does IHS do, and what does it not do?
IHS drafts the operating policies, the evidence map and a mock readiness review. IHS does not run payroll, file taxes, give legal advice or contact the state.