Under a health care flexible spending account (FSA), an employee elects to have his or her pay reduced in exchange for reimbursement of medical expenses that are not covered by the employee's other health plan coverage. During the last few years, some employers have begun issuing debit cards to their employees, allowing medical expenses to be automatically deducted from an employee's FSA when the debit card is presented to a health care provider.
There has been some concern, however, as to whether debit cards are permitted, because applicable rules require substantiation that health care flexible spending accounts are only used for medical expenses. Helpfully, the Internal Revenue Service recently issued Revenue Ruling 2003-43 which specifically permits the use of debit cards and explains the requirements for their use. The Revenue Ruling retains the substantiation requirement, but provides detailed guidance on acceptable methods of substantiation in regard to debit cards.
In fact, the use of debit cards may increase employee participation in health care flexible spending accounts, because debit cards are easy to use and generally eliminate the need for employees to submit claims. Moreover, increased use of health care flexible spending accounts may benefit employers by decreasing payroll taxes, as neither employers nor employees pay social security taxes on health care flexible spending account contributions or reimbursements.