In a recent article in Transaction World, we discussed the multifaceted
personality of the prepaid stored value debit card and touched upon one
of the many uses of the vehicle for the ISO channel as a payroll card
to replace traditional paper based checks. In this article we will
touch upon a variety of health savings accounts that will further drive
employers and employees to prepaid payroll debit cards. Such cards will
be up to the task of assisting in administrating these accounts for the
individuals that are the recipients of them.
In 2003 as part of the Medicare bill that was passed, Congress
implemented HSA legislation which allowed for employee contributions
through a Section 125 �cafeteria� plan which allows for easy
contribution management with both employees and employers able to make
contributions, plus providing a tax break for both groups. The limit
for annual contributions here is $2600; the HSA funds must be managed
by an approved trustee and must be accessible by the employee at all
times
The big concept here is that employees can contribute pre-tax dollars
to a type of account that is specifically geared towards medical
services or prescriptions. While each plan has bonuses and pitfalls
for the various participants, the fact is that for every dollar that an
employee contributes to a health savings account, their employer will
save at least 7.65% in payroll taxes for these pre tax contributions.
This obviously can wind up to be a lot of money. For the moment these
accounts come in several flavors:
Flexible Savings Accounts (FSAs)
These accounts allow for employees to contribute pre tax dollars for
healthcare, dependant care, disability coverage and even term life
insurance expenditures. These accounts have been around for almost 20
years but they have not been too popular as there are claims that have
to be filed for reimbursement of submitted claims. Employers pay for
these administrative costs and current IRS regulations allow employers
the ability to keep the unused employee funds that are not spent by
year end. This is probably the single biggest hindrance to the program
which is clearly illustrated by the fact that there are probably only
2-3 million employees enrolled in this type of program nationwide
today.
Medical Savings Accounts (MSAs)
These are similar to the FSA and have been likened to an individual
owned 401k plan, and began in the late1990�s. Again employees of
employers can pay for medical expenses with pre-taxed
dollars. The big distinction is that the funds contributed to the MSA
can accrue year after year with tax deferred status and are portable to
each employee.
Health Reimbursement Arrangements (HRAs)
These accounts are a hybrid of the first two account types and were
created in the middle of 2002. These plans can be administrated by an
employer or a third party plan service administrator and can be
administrated in conjunction with an FSA which allows for some account
building flexibility for the employees.
From limited data, it appears that in 2003 approximately 300 million
dollars were spent by more than 500 thousand MasterCard�s tied to
Flexible Savings Accounts. There is an expectation that this number
will approach almost 1billion dollars this year as more Visa card
issuers join the fray. Almost 55% of the spending on these accounts
occurs at pharmacies with the average transaction in slight excess of
$50.
With the continuing increases in HMO costs and more and more employers
under pressure to either eliminate or curtail health related spending,
we expect these market forces to propel growth of these medical
benefits accounts over the next few years to double digits. Of course,
there will be a great need for employer/employee education as there are
many choices available and the merging of programs with employee
deductibles and new rules evolving each year.
If we remember the onset of the 401k plans and the amount of education
that went into that push as it related to investments and the like, we
can imagine a double dose as employees now begin receiving plastic
cards versus paper checks.
However the future is certainly bright for pre-paid card products to
play an important role for employees and employers alike. The pre-paid
debit card could have pursing functionality that would allow for
medical expenses to be tracked and spent at specific MCC codes thereby
eliminating much of the paperwork and tracking difficulties. The
prepaid debit cards will reduce out of pocket costs for employees and
lower administrative costs for their employers. In the small amount of
industry data available today, it has been shown that plastic cards see
employee participation in Health Savings Account schemes in excess of
20% higher enrollment rates than those of paper-based check wage
programs.
Even though we can expect the largest of U.S. issuers to push hard into
payroll cards in the coming years, (think about the billions of dollars
of assets that will need to be managed in these health accounts), there
will still be plenty of opportunity for ISO�s to work with aggressive
prepaid debit card issuers. Many of these prepaid card issuers have
newer more robust processing technologies that are not tethered to old
legacy platforms and can configure easily with new medical billing
technologies that need to adjudicate the end user.
For the ISO there will be new residual streams based on individuals as
opposed to individual merchant accounts.
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