Debit Cards Facilitate Use of Flexible-Spending Accounts

Flexible spending plans offered by some corporations just got a whole lot easier to use with new rules allowing debit cards to track the use of pretax dollars employees put away to pay for medical expenses not covered by health plans.

The IRS recently permitted the use of debit cards to cut down on the paperwork usually involved in taking advantage of these flexible-spending plans offered by many employers. These plans allow employees to put a portion of their pretax salary away for anticipated medical expenses during the year. Accessing the money had been a hassle in the past and participation in the programs was low.

Since the IRS ruled that companies could offer debit cards—some even bearing a MasterCard logo to allow for wider usage—participation has increased at some companies. The Wall Street Journal reported that fewer than 400,000 have flexible spending accounts with debit cards but said that industry insiders predict that number to climb to as many as 1.5 million by next year.

The cards are now going into wider use in the federal work force where the tax-free accounts are used for commuting and child-care costs.

The benefit to employers comes in the reduction in their payments to Social Security and Medicare funds. If employers contribute a portion of their pre-tax salary to the tax-free funds, this reduces the overall amount employers use to base their payment to Social Security and Medicare.

The debit card offers employers another incentive to get employees to participate in the tax-free programs. In some cases, the cards are also "smart" enough to weed out inappropriate purchases right at the check out counter. For instance, if a user wants to toss in a pack of gum with his or her prescription, the card will know to reject the gum purchase.

RELATED ARTICLE: New IRS Ruling Permits Pre-Tax Reimbursement for Non-Prescription Drugs

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