It's unusual to introduce enhancements to employee benefits and simultaneously generate expense reductions and increased profit margins for employers. There's typically a direct correlation between value-added benefits and increased costs. While HR departments work to diversify and sweeten benefit packages for the sake of recruiting and retaining quality employees, CFOs work to improve margins in increasingly competitive business environments.
The advent of employee debit cards did just that by offering a combination of consumer-friendly access while
slashing expenses.
In 1999, for example, AmeriFlex introduced the AmeriFlex Convenience Card MasterCard, providing an easier, more convenient method for employees to use their flexible spending accounts.
The debit card allows the automatic electronic transfer of pretax dollars from an employee account when paying for qualified expenses. Employees are able to receive immediate reimbursement of their medical and dependent care expenses simply by using their card at the point of service. The normal paper claims process is eliminated, as are worries about forgotten purchases or lost receipts.
SIMPLE CONCEPT
The cards' use spread quickly nationwide. They can be used wherever credit cards are accepted, and all charges are paid electronically.
For example, the MasterCard system carves the world into more than 1,000 merchant category codes, each
reflecting whether the merchant is a restaurant, department store, gas station, pharmacy or doctor's office.
The debit card recognizes applicable health care, dependent care, and transit MCC/SIC codes, allowing third party adminstrators to properly adjudicate claims according to IRS guidelines.
COMPLIANCE INSURANCE
In May 2003, the IRS released guidelines clarifying the rules for FSA and HRA claims substantiation when debit cards are used. IRS Revenue Ruling 2003-43 upheld the existing substantiation requirements, including employee responsibility and electronic review of claims submission for reimbursement. All allowable auto-adjudication parameters were built into the system, allowing carriers to maintain the convenience of the card while staying within IRS guidelines. These rulings empowered plan administrators to use appropriate technology in the administration of benefits programs.
The Treasury Department and the Internal Revenue Service announced in September 2003 that expenses for
over-the-counter medications could be reimbursed tax free under flexible spending accounts and health care
reimbursement accounts. The growing number of prescription drugs that were transitioning to over-the-counter
availability prompted this change, and it represented a significant enhancement for the participant.
The ruling continues to be a huge benefit for employees, their spouses, and dependents who are regular users of over-the-counter medications.
In May 2005 the Treasury Department and the Internal Revenue Service announced that, effective immediately, employers are permitted to design cafeteria plans that enable participants to be reimbursed for claims incurred up to two-and-a-half months after the close of a plan year.
Prior to this notice, reimbursements were permitted only for claims incurred during the plan year. Under the new ruling, an employee who participates in an FSA plan ending Dec. 31 can still receive reimbursement for claims incurred through March 15 if the extended grace period is adopted by the employer. Since the "use it or lose it" fear of many employees was reduced significantly by the expanded claims reimbursement cycle -- and access to funds can now be better targeted for purchases that the employee actually needs -- there has been a clear increase in both the percentage of employees opting to participate in a Flex Plan and in the level of annual elections, enhancing FICA savings for employees and employers alike.
OPPORTUNITIES ABOUND
The card represents a voluntary benefits revolution: It enhances employee benefits, improves recruitment capabilities, increases FSA participation, and reduces expenses by capturing FICA savings. Studies indicate significant increases in FSA participation, especially in dependent care accounts.
Before the dawn of the debit card, less than 2 percent of an employer's eligible work force elected dependent
care participation due to cash flow constraints that are more commonly known as "double dipping."
The AmeriFlex Convenience Card, for example, boosted dependent care participation by more than 400 percent
-- from less than 2 percent to more than 8 percent -- resulting in substantial tax savings for employers.
For example, if an employer with 200 eligible participants gains an additional 12 participants in the dependent care account, this increase in participation will yield an additional $4,590 in employer FICA savings (based on a $5,000 annual employee election).
Adding flexible spending accounts, health care reimbursement accounts, and health savings accounts in various combinations has made the debit card an even more compelling innovation.
The key is to work with a TPA who can provide plan customization from an integrated platform that includes a single debit card solution and pricing that allows for consolidated reporting and accounting. Selecting debit card technology that is flexible enough to handle a multitude of variations in plan structure is a prerequisite to achieving a seamless compatibility with the electronic payment systems that are critical to these types of plans.
