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For employers that sponsor flexible spending accounts, electronic payment cards, commonly referred to as FSA debit cards, are nothing new. But the way plans must administer debit card programs is now very different.

On May 10, 2003, the Internal Revenue Service issued guidance, Revenue Ruling 2003-43, which explains how to use a stored value card or credit card to pay for medical expenses through a health flexible spending account or health reimbursement arrangement.

The result is that the world of FSA cards is changing.

This article can give only a brief summary of the revenue ruling. Advisors and executives who want to make use of the ruling should consult their legal advisors. But an initial reading of the ruling shows that each permissible arrangement must include the following elements:

o Each plan year, the participant must certify that the card will be used only for eligible medical expenses as defined by Internal Revenue Code Section 213(d).

o The participant must certify that any expenses paid with the card have not been and will not be reimbursed from any other source.

o The special certification should be referenced on the card itself and is to be reaffirmed each time the card is used.

o The employer must employ merchant codes to restrict card usage to medical providers only.

o If an expense is later identified as not eligible, the payment must be reversed by one or more correction methods. The methods are withholding from pay, withholding reimbursement of subsequent eligible expenses against the ineligible balance, and treating the ineligible payment as a debt owed to the employer.

o Participants must retain documentation supporting the expenses paid by the card.

Fortunately, the IRS ruling of May 10 describes 3 types of card transactions that, when combined with the elements described above, meet the requirements of “adequate substantiation” for FSA expenses defined by Treasury regulations.

No additional documentation need be submitted if any of the following expenses are processed through an otherwise valid card arrangement:

(a) Expenses that equal the dollar amount of the participant’s medical plan co-pay amounts.

(b) Recurring expenses that match previously approved amounts.

(c) Expenses that are verified by an independent third party at the point of sale (i.e., real-time matching of the expense against a database of eligible expenses).

But, if a card arrangement does not take advantage of one or more of the automatic substantiation provisions mentioned above, then 100% of those claims must be substantiated manually (typically via paper) after the payment is made.

Many employers that relied on statistical sampling methods have been seeking help from FSA outsourcing specialists.

is a product manager for reimbursement account services at Ceridian Corp., Minneapolis, a provider of managed human resource solutions.


Reproduced from National Underwriter Edition, April 19, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.