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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.
The revenue ruling examines three scenarios. In the first, the employer sponsors one or more major medical plans for employees that provide coverage under accident and health insurance. The employer also sponsors an HRA and HCFSA that reimburse participants' uninsured medical care expenses up to a maximum reimbursement amount that is fixed at the beginning of each year. In conjunction with the HRA and HCFSA, the employer allows electronic reimbursement of medical expenses through the use of a debit card up to the maximum dollar amount in the cardholder's HCFSA or HRA. Use of the card is limited to health care merchants and service providers authorized by the employer; and the employee must certify that the card will only be used for eligible medical care expenses, that any expense paid with the card has not been reimbursed, and that the employee will not seek reimbursement under any other plan covering health benefits. When the card is used at the point-of-sale, the provider is paid the full amount of the charge provided there is sufficient money available in the HCFSA or HRA, and the cardholder's maximum available coverage remaining is reduced by such amount.
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