Accepting FSA Cards?
Getting declined ?
In This Whitepaper
» Understanding FSA,HSA & HRA
Cards
» History of FSA
» Regulations
» How They Work
» Why Are Cards Being Declined?
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As a healthcare establishment you want to ensure you are able to accept FSA, HSA & HRA cards. To do
this it is important to know the differences between FSA, HSA, and HRA health spending accounts and
the regulations around these accounts. It is also important to understand what can cause these health
spending debit cards to decline in your establishment.

Flexible Spending Account (FSA): Introduced in the 1970’s, FSA is an employer-established, taxadvantaged account funded by the employee to pay for qualified medical expenses with pretax dollars.

Health Savings Account (HSA): Created in 2003 as part of the Medicare Prescription Drug
Improvement and Modernization Act an HSA is a Tax-exempt trust or custodial account
created to pay for qualified medical expenses of the account holder and his/her
spouse/dependents.

Health Reimbursement Arrangement (HRA): Created in June of 2002 through Internal Revenue
Service guidance (Rev. Rul. 2002-41 and Rev. Not. 2002-45) an HRA is an employer funded
account used to reimburse employees for qualified medical expenses.
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Inspiring Healthy Business
History of “FSA”
FSA is the oldest and most common of these accounts; therefore, these cards are often
referred to as "FSA" debit cards. Regardless of the type of health spending account the
one key component is “qualified medical expenses.” Per the IRS Publication 502
qualified medical expenses are “the costs of diagnosis, cure, mitigation, treatment, or
prevention of disease, and the costs for treatments affecting any part or function of
the body. Medical care expenses must be primarily to alleviate or prevent a physical or
mental defect or illness. They do not include expenses that are merely beneficial to
general health, such as vitamins or a vacation.”
When FSA’s were introduced the employee would pay for an eligible product or
service and then submit the receipts to the employer or plan administrator and wait
for reimbursement. There were two problems with this method; receipts were often
lost before they could be submitted and the length of time it took for reimbursement.
The cure for these issues came about in the late 1990’s with the issuing of FSA debit
cards. Swiping the card automatically withdraws money directly from an employee’s
health spending account at the point of sale, without the use of a pin number. In that
aspect the cards work similarly to a secured credit card rather than a true debit card.
While these debit cards look and work like any other, they cannot be used for general
purposes. They must only be used for qualified medical expenses.
Regulations
This created an entirely new problem. Retailers unknowingly accepted the health
spending debit cards because they are branded as ordinary Visas, MasterCards and
Discover cards. The cards were being used for non-medical expenses. This then placed
plan administrators in the predicament of having to determine which products and
services were actually eligible.
Thus the IIAS standards were born. The Inventory Information Approval System (IIAS) was first used in 2005, but not officially approved
by the Internal Revenue System until July 2006, in IRS Notice 2006–69. Per the IRS the purpose is to provide “further guidance on use of
debit cards, credit cards, and stored value cards (cards) to reimburse participants in self-insured medical reimbursement plans, such as
health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs).” Its purpose is also to clarify
“certain substantiation methods and requirements that apply to all medical reimbursement plans whether or not a card is used.” In
short, its purpose is to restrict the health spending debit card usage to only qualified medical expenses. The store or pharmacy must
have an electronic system with the ability to differentiate qualified medical expenses from non-qualified medical items.
From these IRS requirements the Special Interest Group for IIAS Standards (SIGIS) was then formed. SIGIS is a non-profit, membership
corporation, launched in 2007. Its purpose is for development and management of an industry standard to meet IRS requirements for
operating an inventory information approval system (an "IIAS"). SIGIS provides a list of eligible over-the-counter medical items that
participating IIAS merchants and benefit plan administrators may access. SIGIS also provides IIAS certification. For drug stores and
pharmacies that meet the IRS criteria as a store that has 90% of gross receipts from prescriptions and other eligible medical expenses,
SIGIS offers a merchant registration program. To register for participation in the SIGIS 90% Rule program, the IRS requires that drug
stores/pharmacies qualify on a store location by store location basis. During registration, a drug store/pharmacy attests that 90% of the
store's gross receipts during the prior taxable year consisted of items which qualify as medical expenses (including over-the-counter
eligible healthcare items). Each tax year the IRS will require 90% Rule merchants to re-register the qualification of each store as a 90%
Rule location. Failure to do so, results in removal from the program.
Benefits of IIAS for the health spending debit card holder:
1. Prevents Overspending – can only spend what is available on the card
2. Guaranteed Reimbursement – Only eligible items can be purchased with the card, there is no worry as to whether or not they
will be reimbursed
3. Eliminates paperwork – no need to send in the receipt/paperwork and wait for the plan administrator to process the item for
reimbursement
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Inspiring Healthy Business
How they Work
1. Items are scanned
2. FSA card is swiped
3. Qualified items are identified based on information loaded
into the IIAS
4. Total amount of qualified items is deducted from the
customer’s health spending account, provided there are
funds available in the account
5. A partial authorization is sent to the retailer
6. The remaining non-qualified items can then be purchased
with another card or form of payment
Why are cards being declined?
There are situations which can cause FSA card declines. Here are some of the most common reasons why FSA cards are declined:





Card not activated (also applies to HSA cards)
Insufficient account balance (also applies to HSA cards)
Purchase of non-eligible items
Card use at a non-IIAS merchant location
Merchant Category Code (MCC)
Card not activated: simply means the card hasn’t been activated. Perhaps the card holder received the card in the mail and forgot
or simply did not call to have it activated.
Insufficient account balance: there aren’t enough funds on the card to cover the purchase.
Purchase of non-eligible items: Health spending debit cards can only be used for qualified medical expenses (allowed by the
benefit plan). A list of qualified medical items can be found under IRS code 502. What the card holder thinks should qualify, what
the IRS says could qualify and what their benefit plan will qualify may differ. For example Dental work, according to the IRS, FSA
cards can be used for X-rays, fillings, extractions, dentures, caps, crowns, fluoride treatments, implants, etc. However per the IRS,
FSA cards cannot be used for bleaching/teeth whitening and bonding of the teeth, because they are considered cosmetic
expenses not medical expenses.
Another example of the should-could-will is tutoring. Per the IRS when recommended by a health care professional for a medical
condition, tutoring fees for a specialized teacher are qualified medical expenses. The card holder would need to submit evidence of
medical necessity (e.g., prescription, doctor's note) with the request for reimbursement. However it is up to the benefit plan as to
whether or not they will actually reimburse for this expense.
Card use at a non – IIAS merchant location: the store or pharmacy must have an electronic system with the ability to
differentiate qualified medical expenses from non-qualified medical items. True pharmacies registered under the 90% rule
program do not have to meet full IIAS requirements. Even then some benefit plans will not approve transactions at pharmacies who
do not meet full IIAS standards. Per SIGIS “employer benefit plans have the right to either accept or decline transactions from
merchants who self certify under the 90% Rule”
Continued…
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Inspiring Healthy Business
Continued… (Why are cards being declined?)
Merchant Category Code (MCC): Merchant Category Code is a four digit number used to identify a business type. The MCC is
assigned based on the primary line of business. Health spending debit cards are designed to work only at merchants that provide
flex-eligible items or services. For example “Massage Therapy” is usually covered under Medical Flex Spending Accounts but a
“sensual massage” is not. So, if you are a massage therapist who has an MCC code of 7297, Massage Parlors accepting the FSA card
will most definitely be declined. However, if your MCC code is 8099-Medical Services & Health Practitioners the card will most
likely be approved, depending on the specific benefit plan. This is a perfect example of why merchants should know their MCC
code.
Understanding the regulations and requirements for merchants and adhering to those requirements will increase the likelihood
you can accept FSA/HSA/HRA cards. If you or the card holder have questions as to why a card was declined or if a card will work
at a particular location or for a particular service, the card holder should contact their card issuer. The card issuer can explain to
the card holder exactly why they declined the transaction. Whereas if you, the merchant, call they can’t tell why the card was
declined, they can only tell you whether or not it will be approved.
Fsa /Hsa /Hra 2013
Understanding the differences
Continued…
For more information on accepting medical reimbursement cards, patient
payments and revenue cycle management contact NTC Healthcare at 1-877-877-6511.
Source:
The Special Interest Group for
IIAS Standards (SIGIS)
https://www.sig-is.org/