NCPA - National Center for Policy Analysis

Debit Cards Allow Instant Access to Flexible Spending Accounts

September 4, 2003

For years, millions of workers have had access to a benefit called flexible spending accounts (FSAs) which allow them to place funds tax free into an account from which to fund medical expenses not covered by insurance. Many do not bother to sign up because of the time and paperwork to get access to the funds. Another reason is that FSAs also have a use-it-or-lose-it feature causing unused funds to be forfeit at the end of the year which also results in many employees not signing up.

A recent IRS ruling is prompting a number of companies to issue debit cards that take the money directly out of the account when they are used at the doctor's office or pharmacy.

  • Although some employers have offered debit cards for several years, most were reluctant until the recent IRS ruling.
  • Currently 40,000 employees have a FSA debit card.
  • A report in the trade publication "Consumer Driven Healthcare" predicts that number could jump to 1.5 million by next April.

Companies have an incentive to sign up workers since doing so lowers the employees' taxable income -- saving both employer and employee payroll tax. Companies that have rolled out debit cards have boosted participation. Some of the more sophisticated systems will reject non-qualifying expenses at the cash register, while others must use plan administrators scrutinize charges to verify they qualify.

Although debit cards reduce paper work, employees still might need to save some receipts in case they must prove expenditures were health related.

Source: Ron Lieber, "Employers Offer New Pretax Perk," Wall Street Journal, September 2, 2003.

For text (WSJ subscription required),,SB106244789330937700-search,00.html


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