FSA debit card
Encyclopedia
An FSA Debit Card is a special type of debit card
issued in the United States
to access tax-favored spending accounts such as flexible spending account
s (FSA) and health reimbursement accounts
(HRA), and sometimes health savings account
s (HSA) as well.
All such cards to date bear the Visa, MasterCard
, or Discover
brand and operate through their main networks; thus all FSA debit card transactions are of the offline variety (also known as "signature debit" or, inaccurately but commonly, "credit"). This can create confusion at merchants such as Wal-Mart
that attempt to "steer" debit cards to online debit (aka "PIN debit" or just plain "debit"); FSA debit cards will not work that way.
and drugstore.com
have "FSA stores" designed for use with these cards, whether tied to medical FSAs, HRAs or HSAs.
Though a few FSA debit cards are also issued for dependent care and transportation expenses, most are issued for medical expenses. (The rest of this article deals only with FSA debit cards used with medical FSAs, HRAs or HSAs.)
Traditionally, to meet Internal Revenue Service
(IRS) substantiation requirements, FSAs were accessed only through claims for reimbursement after incurring (and usually paying) an out-of-pocket expense, often after deductions were already made from the employee's paycheck to fund the FSA; this is commonly known as "double-dipping". This, along with the so-called "use it or lose it" rule (i.e., all funds not spent are forfeited), has long been seen as one of the problems minimizing utilization of FSAs.
The FSA debit card was developed to avoid this problem by allowing users to access their FSA directly without "double-dipping", and also (where possible) to provide methods for automating the IRS substantiation requirements which often require substantial paperwork and manpower. Substantiating an FSA debit card transaction without paperwork is known as "auto-adjudication".
HRAs, which were introduced later, technically don't involve "double-dipping" because they are funded by employer funds, not by employee funds; however, they are subject to the same IRS requirements as FSAs, and thus are generally accessed only by paper claims or debit cards just like FSAs.
Unlike FSAs and HRAs, HSAs do not require substantiation prior to withdrawal; users need only retain their receipts with their tax papers. However, since most HSA providers came from FSA and HRA backgrounds, most offer substantiation services for HSAs that are similar to those for FSAs and HRAs. Though many HSA providers offer unrestricted debit cards and even credit card
s with their accounts, some voluntarily choose to issue FSA debit cards and impose the same restrictions on their use as those required by the IRS for FSAs and HRAs.
Flexible Spending Accounts (FSAs), commonly referred to as “Section 125” plans or “Cafeteria” plans, were developed as part of Internal Revenue Code Section 125 to provide employees with tax relief for their un-reimbursed medical and dependent day-care costs. FSAs enable employees to utilize pre-tax dollars and save Federal, FICA, and, in most cases, state taxes when paying for eligible expenses not covered by traditional insurance plans.
The most common method of auto-adjudication is known as "copay matching". Under Ruling 2003-43 as amplified by Notice 2006-69, the FSA or HRA provider must obtain from the employee's health plan the standard copayment amounts for that plan. If the charge is exactly equal to between one and five of those copayment amounts, it may be auto-adjudicated and approved without receipts. If the health plan has different copayment amounts for a particular type of charge, any valid combination of copayment amounts may be approved, up to five times the highest possible copayment amount.
Also, charges may be auto-adjudicated if they are accompanied by electronic information substantiating that the charge is for medical purposes. This may be done through such means as including details of the transaction with the charge (Ruling 2003-43) or forwarding the health plan's explanation of benefits to the FSA or HRA provider for further processing (Notice 2006-69).
Under Notice 2006-69, all charges from a merchant with an IIAS may also be auto-adjudicated; however, beginning in 2007 the merchant must make available to the employer the detailed records of all such transactions for IRS review. This may be done either automatically or in response to an IRS audit of the employer.
If the charge is not substantiated by auto-adjudication or receipts, the FSA or HRA provider must recoup the charge and suspend the card until it is recouped. In addition to voluntary methods of recoupment, employers commonly use payroll deduction, as well as offsetting the recoupment against future paper claims. If all else fails, the employer may add the amount of the charge to the employee's W-2 as taxable income.
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
issued in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
to access tax-favored spending accounts such as flexible spending account
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
s (FSA) and health reimbursement accounts
Health Reimbursement Account
Health Reimbursement Accounts or Health Reimbursement Arrangements are Internal Revenue Service -sanctioned programs that allow an employer to set aside funds to reimburse medical expenses paid by participating employees...
(HRA), and sometimes health savings account
Health savings account
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account...
s (HSA) as well.
MasterCard
Mastercard Incorporated or MasterCard Worldwide is an American multinational financial services corporation with its headquarters in the MasterCard International Global Headquarters, Purchase, Harrison, New York, United States...
, or Discover
Discover Card
The Discover Card is a major credit card, issued primarily in the United States. It was originally introduced by Sears in 1985, and was part of Dean Witter, and then Morgan Stanley, until 2007, when Discover Financial Services became an independent company. Novus, a major processing center, used to...
brand and operate through their main networks; thus all FSA debit card transactions are of the offline variety (also known as "signature debit" or, inaccurately but commonly, "credit"). This can create confusion at merchants such as Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
that attempt to "steer" debit cards to online debit (aka "PIN debit" or just plain "debit"); FSA debit cards will not work that way.
Background
Though these cards can be issued with HRAs and HSAs as well as FSAs, the FSA is the oldest and most common of these accounts; therefore, for simplicity these cards are often referred to as "FSA" debit cards. WalgreensWalgreens
Walgreen Co. , doing business as Walgreens , is the largest drugstore chain in the United States of America. As of August 31st, the company operates 8,210 locations across all 50 states, the District of Columbia and Puerto Rico. Founded in Chicago, Illinois in 1901, and has since expanded...
and drugstore.com
Drugstore.com
Drugstore.com is an Internet retailer in health and beauty care products headquartered in Bellevue, Washington. Its web operations were launched on February 24, 1999....
have "FSA stores" designed for use with these cards, whether tied to medical FSAs, HRAs or HSAs.
Though a few FSA debit cards are also issued for dependent care and transportation expenses, most are issued for medical expenses. (The rest of this article deals only with FSA debit cards used with medical FSAs, HRAs or HSAs.)
Traditionally, to meet Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) substantiation requirements, FSAs were accessed only through claims for reimbursement after incurring (and usually paying) an out-of-pocket expense, often after deductions were already made from the employee's paycheck to fund the FSA; this is commonly known as "double-dipping". This, along with the so-called "use it or lose it" rule (i.e., all funds not spent are forfeited), has long been seen as one of the problems minimizing utilization of FSAs.
The FSA debit card was developed to avoid this problem by allowing users to access their FSA directly without "double-dipping", and also (where possible) to provide methods for automating the IRS substantiation requirements which often require substantial paperwork and manpower. Substantiating an FSA debit card transaction without paperwork is known as "auto-adjudication".
HRAs, which were introduced later, technically don't involve "double-dipping" because they are funded by employer funds, not by employee funds; however, they are subject to the same IRS requirements as FSAs, and thus are generally accessed only by paper claims or debit cards just like FSAs.
Unlike FSAs and HRAs, HSAs do not require substantiation prior to withdrawal; users need only retain their receipts with their tax papers. However, since most HSA providers came from FSA and HRA backgrounds, most offer substantiation services for HSAs that are similar to those for FSAs and HRAs. Though many HSA providers offer unrestricted debit cards and even credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s with their accounts, some voluntarily choose to issue FSA debit cards and impose the same restrictions on their use as those required by the IRS for FSAs and HRAs.
Flexible Spending Accounts (FSAs), commonly referred to as “Section 125” plans or “Cafeteria” plans, were developed as part of Internal Revenue Code Section 125 to provide employees with tax relief for their un-reimbursed medical and dependent day-care costs. FSAs enable employees to utilize pre-tax dollars and save Federal, FICA, and, in most cases, state taxes when paying for eligible expenses not covered by traditional insurance plans.
Where FSA debit cards may be used
Unlike other debit cards, the IRS does not allow FSA debit cards to be used at every merchant that accepts Visa or MasterCard. Rather, only the following types of merchants may accept an FSA debit card, usually enforced using "merchant category codes" or "merchant type codes" assigned by Visa and MasterCard:- Medical providers such as doctors and hospitals.
- Merchants with an inventory information approval systemInventory information approval systemThe Inventory Information Approval System, or IIAS, is a point-of-sale technology used by retailers that accept FSA debit cards, which are issued for use with medical flexible spending accounts , health reimbursement accounts , and some health savings accounts in the United States.By the end of...
(IIAS). In an IIAS, a merchant flags "FSA-eligible" items in its point of salePoint of salePoint of sale or checkout is the location where a transaction occurs...
database so they can be separated from all other items by its scanner (brick-and-mortar) or shopping cart (online); it then permits only the "FSA-eligible" items to be charged to the card, with another form of payment required to purchase all other items. - Until December 31, 2007, all grocers, discounters, and online pharmacies. These merchants must install an IIAS to accept the card after this date.
- Until December 31, 2008, all "true pharmacies" (i.e., those not located inside grocery or discount stores and not online). They must install an IIAS after this date, unless 90% or more of their sales are of FSA-eligible items (prescriptions or over-the-counterOver-the-counter drugOver-the-counter drugs are medicines that may be sold directly to a consumer without a prescription from a healthcare professional, as compared to prescription drugs, which may be sold only to consumers possessing a valid prescription...
items).
IRS requirements
Under IRS Revenue Ruling 2003-43, every transaction on an FSA debit card must be either substantiated or recouped from the employee. Substantiation can be through either electronic evidence (auto-adjudication) or paper receipts submitted by the user (similar to paper claims). The process of obtaining receipts or recoupment when auto-adjudication is not possible is known as "pay and chase", a term the IRS also used in its most recent ruling (Notice 2007-02).The most common method of auto-adjudication is known as "copay matching". Under Ruling 2003-43 as amplified by Notice 2006-69, the FSA or HRA provider must obtain from the employee's health plan the standard copayment amounts for that plan. If the charge is exactly equal to between one and five of those copayment amounts, it may be auto-adjudicated and approved without receipts. If the health plan has different copayment amounts for a particular type of charge, any valid combination of copayment amounts may be approved, up to five times the highest possible copayment amount.
Also, charges may be auto-adjudicated if they are accompanied by electronic information substantiating that the charge is for medical purposes. This may be done through such means as including details of the transaction with the charge (Ruling 2003-43) or forwarding the health plan's explanation of benefits to the FSA or HRA provider for further processing (Notice 2006-69).
Under Notice 2006-69, all charges from a merchant with an IIAS may also be auto-adjudicated; however, beginning in 2007 the merchant must make available to the employer the detailed records of all such transactions for IRS review. This may be done either automatically or in response to an IRS audit of the employer.
If the charge is not substantiated by auto-adjudication or receipts, the FSA or HRA provider must recoup the charge and suspend the card until it is recouped. In addition to voluntary methods of recoupment, employers commonly use payroll deduction, as well as offsetting the recoupment against future paper claims. If all else fails, the employer may add the amount of the charge to the employee's W-2 as taxable income.