Businesses in health care services are often expected to accept debit cards issued for Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs). However, the requirements for accepting such cards are strict, and the penalties customers face when they use an HSA or FSA card for non-qualified health care expenses are severe.
In this article, we explain where HSA and FSA cards come from, which businesses are qualified to accept them, and how businesses can detect HSA and FSA cards at the time of purchase to stop their customers from accidentally using their HSA and FSA cards for non-qualified health care expenses.
Both HSA and FSA are special employer-sponsored accounts where employees can store money for qualified healthcare-related expenses, such as hospital fees, fertility treatments, and even the purchase of a wig. They are tax-advantaged, so the money that goes into them is tax-free.
The list of qualified healthcare-related expenses is large and covered by the IRS Publication 502, which defines them as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.”
The difference between the two is that the FSA is a spending account that cannot be used for investing. In 2018, employees can set aside up to $2,650 in their FSAs, up from the 2017 limit of $2,600. The money in an FSA account must be spent by the end of each year otherwise it is forfeited to the employer. Some employers, however, allow employees to carry over up to $500 to the next year instead.
The HSA, on the other hand, is a savings account that can be used for investing, much like a 401(k) or IRA. The money employees set aside in their HSAs also roll over from year to year and can be transferred from job to job, making the HSA a fantastic investment vehicle for accumulating tax-free money. According to an IRS bulletin published in March 2018, individual employees can contribute up to $3,450 and a family can contribute up to $6,900 to their accounts.
The HSA is sometimes said to offer a triple-tax advantage as the money put into an HSA goes in before taxes, can be used for tax-free investing, and, finally, comes out tax-free for qualified medical expenses. The HSA is available only with HSA-qualified high-deductible health care plans that have deductibles starting at $1,350 for singles and $2,700 for families, as specified in this document.
To prevent the abuse of the system by using HSA and FSA cards on ineligible expenses the Inventory Information Approval System (IIAS) was created to provide “guidance on use of debit cards, credit cards, and stored value cards to reimburse participants in self-insured medical reimbursement plans, such as health flexible spending arrangements (health FSAs),” according to the IRS, which approved the system in July 2006, in IRS Notice 2006–69.
Businesses that would like to accept HSA and FSA cards for qualified medical purchases must have the correct Merchant Category Code (MCC), in accordance with the regulations. There are many MCCs, but only a small handful are defined as healthcare providers, such as 8021 (dentists, orthodontists), 8062 (hospitals), or 5975 (hearing aids stores).
In addition to this, businesses are also required to complete registration with SIGIS (Special Interest Group for IIAS Standards), whose purpose is to develop and manage industry standards to meet IRS requirements for operating an IIAS. To register, businesses must attest that 90 percent of their gross receipts during the prior taxable year consisted of items which qualify as medical expenses.
If your business is not qualified to accept HSA and FSA cards, you can use our comprehensive BIN database to stop unauthorized purchases.
This is how an entry in our database looks like.The fifth parameter (HSA NON SUBSTANTIATED) is the category of the card, which, as you can see, is HSA.
510460;MASTERCARD;U.S. BANK, N.A.;DEBIT;HSA NON SUBSTANTIATED;UNITED STATES;US;USA;840;WWW.USBANK.COM;1-800-US-BANKS
