The Loop

Using Debit Cards For Health Spending Accounts

Filed under: Benefits

Most financial institutions that administer health spending accounts issue a traditional debit card that can be used as to pay for certain medical expenses using funds held in that account. The following are today’s most popular types of health spending accounts:

  • Health savings account (HSA) – a tax-exempt account that a consumer establishes in combination with a high-deductible health plan to pay for or reimburse qualified medical expenses not covered by the insurance policy. Both the consumer and/or his sponsoring employer may make contributions to the account, subject to annual limits. Assets in the account may be invested and earnings and withdrawals are tax-free as long as they are used to pay for qualified medical expenses. An HSA is “portable”, meaning that the worker continues to own the account even if he changes employers or leaves the work force.
  • Flexible spending account (FSA) – an employer-sponsored account that can be used to pay for copayments, deductibles, certain drugs and other health-related expenses. The consumer and/or his sponsoring employer may make contributions to the account, subject to annual limits. FSA contributions are tax-exempt and reimbursements are tax free if used to pay for qualified medical expenses, but funds must be used within a certain time frame or they are no longer available to the worker.
  • Health reimbursement arrangement (HRA) – an account funded solely by the sponsoring  employer. Tax-free funds can be used to reimburse qualified medical expenses up to a maximum dollar amount for a coverage period. Any unused funds may be carried forward for reimbursements in later years.

Debit/Credit Card

An HRA, FSA, or HSA card works like a regular debit card, but it can be used only for specific qualified medical expenses. Eligible expenses are defined by federal legislation and IRS regulations. Cardholders can use the debit card at approved merchants that accept standard VISA or Mastercard. However, the card generally only works at businesses that sell health-related products and services, such as drug stores, doctor’s offices, vision centers, hospitals, grocery and warehouse stores that have pharmacies. In other words, you can’t use it to buy gas or a meal at a restaurant.

Inventory Information Approval System (IIAS)

Many healthcare debit cards are associated with the Inventory Information Approval System. This is a process that basically recognizes, at the point of sale, if an item charged to the card is eligible to be paid for using an HSA, FSA, or HRA. In fact, the IRS requires that many retail locations use the IIAS system to certify expenses or reject them as ineligible. If the merchant rejects ineligible items, it will ask for another form of payment. It may be helpful to separate eligible and ineligible items at check out and pay for them via two different forms of payment. Most large national and regional pharmacy, supermarket and wholesale chains, such as CVS, Kroger, Wal-Mart and Costco, utilize the IIAS process. The majority of local and smaller pharmacies do not, but may still accept the debit card for health-related purchases.

ATM Usage

Only an HSA debit card can be used to withdraw funds from an ATM. Note that the cardholder can make withdrawals or balance inquiries at an ATM, but not transfers or deposits. Withdrawals typically have limits, such as $500 per day, and fees may be charged by either the HSA bank or ATM, or both.

Be aware that the cardholder selects a different process based on her account status. If the HSA account is in her name (and her name is on the card), she may choose to make a credit or debit transaction at the ATM. A credit transaction is available as soon as the card is activated, but a debit transaction requires the account owner to first establish a PIN before use at an ATM. On the other hand, if a spouse or dependent of the account owner is withdrawing cash from an ATM, that person must choose to make a debit transaction and input the requisite PIN number.

Point of Payment

In most situations, a cardholder will need to input the debit PIN or sign a receipt at the payment terminal to use health account funds for qualifying medical expenses. The payment will be declined if there are insufficient funds in the account to cover the purchase. However, the cardholder can use a personal form of payment or ask the merchant to split the purchase between two forms of payment. This will enable him to use his available health account balance and then pay the difference via another method, then reimburse himself later when there are more funds in the account.

Many providers that send bills by mail or email allow the health account owner to include their debit card information so that funds are paid directly to the healthcare provider. This eliminates the need to send a check to the provider and then be reimbursed by the health spending account later.

Additional Considerations

Just like a credit card, the account holder should always report a lost or stolen debit card and request a new one. That way any post-reported charges will be flagged and investigated. Note that the administering company also may charge a fee to replace a card or order an additional card for the account holder’s spouse or dependent. However, the spouse or dependent’s name does not need to be on the debit card when used with a PIN at a payment terminal.

 Also be aware that some health account debit cards place a daily maximum limit on charges, such as $3,000. If the account owner needs to access more account funds to make a payment, he should use an HSA check or his own funds – and reimburse himself at a later time. Speaking of which, it is very important to retain itemized receipts for charges paid for with a health account debit card. These may be necessary for reimbursement from the administering bank, through the sponsoring employer, or for tax purposes in the event of an audit.

Bottom line: With a debit card, the health spending account holder does not have to pay out of pocket for qualified medical expenses and then file for reimbursement later. It’s a win-win scenario for both the worker and her employer, as debit cards substantially reduce the number of claims that require filing and processing.

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