IRS OKs Flex Credit Cards

September 26, 2003
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GRAND RAPIDS — Using a credit card at a physician’s office or pharmacy is nothing new.

But now the IRS has released rules permitting health consumers in certain employer group health insurance plans to use dedicated credit and debit cards.

According to an article written by Sue D. Conway, a local attorney, the IRS ruling in question would enable employees to use credit and debit cards to pay medical expenses in Section 125 flex spending accounts (FSAs) and in health reimbursement arrangements (HRAs).

Conway, who is with the Grand Rapids office of Warner Norcross & Judd, wrote her analysis of the new ruling in the Warner-Norcross newsletter.

She indicated that Revenue Ruling 2003-43 sets forth “safe harbor guidelines” for firms considering whether to introduce a credit card program.

She explained that the rationale for bringing debit or credit cards into play is that — from an employee’s perspective — they would eliminate claims processing delays and up-front, out-of-pocket payments.

“Traditionally, FSAs have worked like this,” Conway wrote. “An employee pays for the covered medical expense out of his/her own pocket and then applies to the employer (or a third-party administrator) for reimbursement.

“This involves administrative paperwork and the employee must wait for reimbursement,” she wrote, adding that much of the paperwork is due to IRS requirements substantiating that the medical expense was incurred, was qualified, the amount of the expense, and that it was not and could not be reimbursed through any other plan.

“The new Revenue Ruling,” she wrote, “describes a ‘safe harbor’ method by which the substantiation requirements can occur electronically.”

Conway’s run-down of the guidelines concerning the use of such cards indicated that:

  • Employees must certify in writing upon enrollment in the health care plan, and recertify annually, that they will use the card in question only for eligible medical expenses for themselves and covered dependents.

  • The employees also pledge in the certification that the expenses they pay with the card will not have been reimbursed by any other health plan and that they will seek no reimbursement under any other plan.

  • The employees must keep receipts for medical expenses paid with the card.

  • In the case of an FSA, the card’s “credit limit” is identical to the maximum annual amount the holder elects at the opening of the plan year.

  • The card will be cancelled when employment with the firm terminates. Conway advised, however, that indications are that the guidelines could permit continued use of the card in the instance the former employee decided to use the COBRA option.

  • The IRS indicates every claim paid with the card must be substantiated. Conway wrote that that in the absence of further guidance from the agency, an employer should not depend upon sampling techniques.

“Substantiation is automatic in some cases,” Conway added.

Such cases, she advised, are instances where the amount of the transaction equals the co-payment under the employer’s major medial plan for, say, the co-pay charge for an appointment with a physician.

Substantiation, likewise, would be automatic when the beneficiary must pay a regularly recurring expense such as a prescription refilled for the same amount at the same pharmacy or pharmaceutical mail-order source.

Neither is verification required, her article advised, if the provider at the point of sale employs an electronic code that furnishes requisite information to the claims administrator.

“All other charges will be treated as conditional,” she added, “pending receipts submitted by the participant.”

Too, she stressed that the guidelines indicate the plan must have procedures to recover improper payments if it later comes to light that a claim was not eligible for reimbursement.

“The ruling describes a correction method,” Conway wrote, “that involves employee reimbursement of the plan, either voluntarily or through offsets or withholding of other benefits. The guidance also requires employers to report card payments to medical service providers on Form 1099-MISC if they total $600 or more in a taxable year.”

She said that promulgation of the new IRS guidance leads to the expectation that more employers will implement credit or debit card reimbursement.

She said it’s also expected and that employee participation in flex programs will increase because it no longer will be necessary for employees to make payments up front and await processing for reimbursement.

Conway wrote that employers who want to use credit or debit cards will need to review and modify their plan documents and summary plan descriptions to add the new procedures and safeguards that the IRS prescribes.

“If an outside claim administrator is used,” she added, “employers should ensure (through their contract with the administrator) that substantiation methods are in place that comport with IRS guidance.”

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