FSA debit cards.

A recent Internal Revenue Service ruling permits the use of electronic debit cards to reimburse employees in Flexible Spending Accounts, health reimbursement arrangements or other employer-funded health accounts.

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Technological advances coupled with regulatory changes in health care have led to increased attention to the use of electronic debit cards that allow employees instant access to their Flexible Spending Accounts. These benefit programs allow employees to set aside pre-tax dollars from their paychecks to cover personal health care, dependent care or transportation expenses.

This feature might boost the use of FSAs, in which only 18 percent of employees choose to enroll, according to a survey by Mercer Human Resource Consulting. The "use-it-or-lose-it" feature of FSAs makes employees wary of putting away too much money for fear of losing it. The paperwork involved in saving receipts, mailing them and waiting for the money has also been a deterrent.

FSA debit cards address some of these challenges by enabling employees to use the cards at doctor's offices, hospitals and pharmacy retailers, essentially those that provide health-care services or prescriptions and accept Master Card or Visa. Debit cards also bring substantial FICA tax savings for employers. With the IRS allowing for many over-the-counter medicines, such as those for allergies, antacids and pain relief to be included under the plans, employees will find debit cards easier and more desirable to use.

While there will no doubt be a few glitches to iron out, the returns in terms of tax savings for both employees and employers should make the use of debit cards for FSA accounts much more widespread. (See page 50 for new FSA rules on over-the-counter medicines.)

Source: American Society of Employers, a Bronze-level member of the Detroit Regional Chamber.