It's becoming more attractive for companies to use debit card technology for flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) because the Medicare Prescription Drug and Modernization Act exempts them from an IRS paperwork requirement.

Under federal law, a Form 1099 information report is required for any trade or business payment of $600 or more,

Basic HRA Requirements

    The arrangement must be paid for solely by the employer and cannot be provided through a salary reduction arrangement or cafeteria plan.
    It must reimburse the employee for health care expenses incurred by employees, spouse and dependents.
    The plan must provide a maximum dollar amount for a specific coverage period.
    It must allow unused portions of the maximum dollar amount to be carried over to increase the maximum allowed for subsequent coverage periods. 
including medical and health care payments. A copy is sent to the IRS and the recipient of the payments. Traditionally, this wasn't too big an issue for FSA and HRA participants, since participants in both types of plans paid the expenses out of their own pockets and then filed a reimbursement claim with the employer or the plan's administrator. The medical services providers weren't paid directly by the plans.

Debit Card Use

This changed way back in 2003, when the IRS approved the use of debit cards for both FSAs and HRAs. (IRS Revenue Ruling 2003-43)

Participants can use the card for co-payments, prescriptions, or other health care costs, rather than paying these expenses out-of-pocket and filing a claim for reimbursement. The convenience of debit cards and the elimination of out-of-pocket payments and claims filing is thought to encourage participation in these plans.

The Problem for Employers

However, there was a downside. IRS Revenue Ruling 2003-43 specified that payments made to medical service providers through the use of debit, credit, or stored value cards were reportable on Form 1099-MISC. So, while these types of cards were easy for participants to use, the Form 1099 requirement burdened employers with additional administrative tasks.

With the elimination of the requirement, which affects only medical payments, debit card arrangements are now more attractive to employers.

If you have been considering adding a debit card feature to your FSA or HRA, increased participation in the plan and better appreciation of your benefits offerings are likely results -- without the added paperwork.

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