Use of Debit and Credit Cards by Cafeteria Plans Approved

The Internal Revenue Service has ruled for the first time that properly substantiated employer-provided medical expense reimbursements made through debit or credit cards under a health reimbursement arrangement (HRA) or health care flexible spending account (HCFSA) are excludable from gross income under Section 105(b) (Rev. Rul. 2003-43). The use of debit or credit cards by HRAs and HCFSAs will greatly streamline the reimbursement process and will eliminate employees' out of pocket expenses at the point of service — making these programs much more appealing to employees. For example, if an employee has $1,000 in his HCFSA for a year, he can use his debit card to cover a copayment at his doctor's office, purchase prescription drugs at a pharmacy, and pay other medical expenses throughout the year up to $1,000 and he will not be required to substantiate the charges with a receipt. This program is also favorable for employers because increased use of HCFSAs and HRAs will result in employer FICA tax savings. However, it is important for law firms to note in selecting the debit or credit card features for their plans that medical care expense reimbursements under an HRA or HCFSA are not excludable from the gross income of self-employed individuals, including partners.