Joy Sellstrom and Dawn Sellstrom Published in Summer 2007 Issue of the ABA’s Employee Benefits Committee Newsletter
“Do You Take Debit Cards?”

Joy Sellstrom and Dawn Sellstrom’s article, “Do You Take Debit Cards?” was published in the Summer 2007 issue of the ABA’s Employee Benefits Committee Newsletter. In their article, Joy and Dawn advise that even though “the use of [debit] cards is appealing, their use is limited under current IRS guidance and both employers and vendors must proceed with caution when implementing debit card programs.”

For approved healthcare-related reimbursements, for example, the authors note that, “debit cards cannot be used at a store or other merchant without a healthcare-related MCC [merchant category code].” Pursuant to new guidance, however, “debit cards can now also be used at merchants with non-health related MCCs if they have established an inventory information approval System (‘IIAS’).” Joy and Dawn state that “many large national retailers and wholesale clubs do not have healthcare-related MCCs,” and the IRS has created transitional relief for such retailers. After December 31, 2008, however, “debit cards may not be used at stores with drugstore and pharmacy related MCCs, unless the store adopts an IIAS or 90% of each store’s gross receipts during the prior taxable year consisted for items that qualify as expenses for medical care under IRC Section 213 (d)….”

The authors further note that the IRS issued guidance in 2006 that, “permits the use of debit cards to pay dependent care expenses if the dependent care provider is set up to accept electronic payment.” Joy and Dawn also point out that, “In Rev. Rul. 2006-57, the IRS examined and approved the use of smartcards, debit or credit cards, in some cases as the equivalent of a ‘voucher,’ for use in providing tax-free transit expenses under a QTFB [Qualified Transportation Fringe Benefit] plan” under certain circumstances.

In conclusion, Joy and Dawn note that, “Given the restrictions on debit cards currently and the tighter restrictions beginning in 2009, employers should review their plan documents, summary plan descriptions, debit card procedures and vendor agreements to make sure they are in compliance.”