QUESTION: Our company is thinking about implementing a debit card program for participants in our health FSA. We understand that IRS guidance restricts use of these cards to certain merchants. Where can our health FSA participants use debit cards to pay for medical care expenses?
ANSWER: You are correct that IRS guidance restricts the locations at which health FSA debit cards can be used. First, cards can be used at medical care providers (e.g., physicians, dentists, vision-care offices, and hospitals), as identified by merchant category code (MCC). When cards are used at these health care-related merchants, some categories of expenses will qualify for automatic substantiation, while after-the-fact substantiation will be required for all other expenses. Second, cards can be used at merchants (including those not identified by MCC as medical care providers) that have in place an inventory information approval system (IIAS) to ensure that cards are used only for eligible medical care expenses.
Special rules apply to stores with the “drug stores and pharmacies” MCC. Cards may be used at these stores if either (1) the store uses an IIAS that meets IRS requirements; or (2) 90% of the store’s gross receipts during the prior taxable year (determined on a store-location-by-store-location basis) consisted of items that qualify as medical care expenses under Code § 213(d). Card use at stores that meet this “90% rule” is subject to the same debit card substantiation rules that apply to merchants that are identified by MCC as medical care providers. Keep in mind that regardless of where health FSA debit cards are used, such cards can only be used for eligible medical care expenses as defined in Code § 213(d).
Use of health FSA debit cards at merchants other than those described above is not permitted, even if the cards are used to purchase items that qualify for reimbursement under a health FSA. Consequently, your company should make sure that any health FSA debit card program under consideration places appropriate limits on the merchants at which cards can be used. And, of course, many other requirements apply to health FSA debit card programs. For example, there are requirements regarding participant certification and recordkeeping, and there must be meaningful correction procedures in place to recoup improper payments (sometimes called “pay and chase” provisions). Your company should review all requirements thoroughly before implementing a debit card program.
For more information, see EBIA’s Cafeteria Plans manual at Section XXI.G (“Electronic Payment Card Programs for Health FSAs”). For information about debit card programs under HSAs and HRAs, see EBIA’s Consumer-Driven Health Care manual at Sections VIII.C.7 (“Individual May Choose HSA Distribution Method”) and XXIV.D (“HRAs: Substantiation”).
Contributing Editors: EBIA Staff.