Approximately 20 to 25 million participants in employer-sponsored flexible spending accounts, or FSAs, had plenty to consider as the year wound to a close.
In December, the typical plan participant has to anticipate his or her medical expenses for the upcoming year and decide how much to set aside from each paycheck. What's more, the "use it or lose it" provision often inspires a last-minute trip to the chiropractor or other qualified medical provider.
These nettlesome provisions have made it worthwhile for companies such as Waltham, Mass.-based MBI, in conjunction with MasterCard and KeyCorp, to provide employers with health care debit cards that improve the flexibility of FSA programs while easing the paperwork burden.
MBI's health care debit card, a MasterCard-branded product issued by KeyCorp, Cleveland, Ohio, only allows purchases of qualifying expenses under IRS regulations. "We'll turn off codes like gas stations and restaurants," said Rob Butler, vice president of sales and marketing at mbi upper or lower case?. "Beyond that, we put in filters in terms of allowing eligible expenses to go through."
The third-party administrator, or TPA, plays an important role in vetting those expenses. "The TPA then will do the filtration and the after-the-fact adjudication to make sure that you're compliant with the IRS," said Butler. "When you swipe the card, that information appears real-time on the TPA's desktop."
Authorized transactions are debited immediately from the company's account. "Once the card is swiped, the money is drawn from whatever account has been designated by the employer," said Butler. "Employers don't have to change their banking relationships."
However, health care debit cards certainly siphon off transactions that employees had previously conducted using personal checking, credit or debit accounts. While that's a potential loss of wallet share for the traditional card issuers, as well as foregone opportunity to collect frequent flier miles, instant reimbursement offers a clear benefit to plan participants.
Employers have the incentive to encourage participation in FSAs, since they need not set aside FICA taxes on FSA contributions. By using debit cards to make it easier for employees to draw down their funds, employers can get a sustained boost in the usage of FSAs, with the accompanying tax advantage. "With our card, on average, people get through their FSA dollars quicker, like in June or July," said Butler. "The following year, when re-enrollment occurs, people put 30 percent more dollars in."
Indeed, employers can juice FSA spending by effectively extending a line of credit to their employees for the entire amount set aside for the year. Under the traditional system, FSA funds are available only as they accrue. As a result, an FSA deduction taken on Dec. 15 has to be spent by the end of the year. But through a debit card implementation, that problem is history. "It's fully loaded on 1/1 by the employer, and then the employer will take those same payroll deductions over the year," said Bill Mathis, senior vice president of member relations, MasterCard International. "As an employee now, you have access to the full amount."
Including recent customer wins, MBI reports having 180 TPA customers serving approximately 250,000 employees at 4,000 companies, including Synovus, Zions Bancorp and MasterCard.