Are Gift Cards Considered Prepaid Cards?
Is a gift card a prepaid card? This article clarifies the distinctions and shared qualities of these common payment methods.
Individuals often confuse gift cards and prepaid cards. While both involve funds loaded in advance, their purposes, functionalities, and regulatory frameworks differ significantly. This article clarifies the characteristics of each and highlights their unique aspects.
Understanding Gift Cards
A gift card functions primarily as a voucher, intended for gifting or as a promotional tool. These cards are pre-loaded with funds that can be redeemed for goods or services. Many gift cards operate within a “closed-loop” system, meaning they are tied to a single merchant or group of affiliated businesses.
Some gift cards are “open-loop” and carry the branding of major payment networks like Visa or Mastercard. These can be used more broadly wherever the network is accepted, similar to a debit card. Federal law, the CARD Act of 2009, stipulates that gift cards cannot expire less than five years from activation or last reload. This law also restricts inactivity or dormancy fees, permitting them only after 12 months of inactivity and limiting them to one per month.
For employers, the IRS generally considers gift cards given to employees as taxable wages, subject to income and employment taxes. They are viewed as cash equivalents, taxable regardless of value. A narrow exception exists for gift certificates redeemable for specific, minimal-value items; general merchandise or cash-equivalent gift cards do not qualify as non-taxable fringe benefits.
Understanding Prepaid Cards
Prepaid cards function as a budgeting tool or alternative to a bank account. These cards are reloadable, allowing multiple reloads. They are widely accepted through major payment networks, enabling purchases and ATM withdrawals, like a debit card.
Prepaid cards are not tied to a specific merchant, providing broad utility. Common types include general-purpose reloadable (GPR) cards, payroll cards, and government benefit cards. Funds on registered prepaid cards can be eligible for FDIC pass-through insurance up to $250,000, if held at an FDIC-insured bank. Registration with the issuer is often required for this protection.
These cards are subject to consumer protections under federal law, primarily the EFTA and Regulation E. These regulations provide rights like error resolution and limited liability for unauthorized transactions, similar to bank accounts. The CFPB has enhanced these protections through its Prepaid Accounts Rule. The framework also prohibits employers or government agencies from requiring wages or benefits through a specific prepaid account.
Key Distinctions Between Them
The primary distinction lies in their intended purpose. Gift cards are designed for one-time use as a gift or promotional incentive. Prepaid cards are structured for ongoing financial management and general spending.
Reloadability is another significant difference. Most gift cards are non-reloadable; once the balance is spent, the card is depleted. In contrast, many prepaid cards are designed to be reloadable, allowing repeated fund additions. This supports their use as a long-term budgeting or payment tool.
Acceptance also varies. Many gift cards are “closed-loop,” limited to specific merchants. Prepaid cards are “open-loop,” offering broad acceptance wherever the associated payment network is accepted. This utility makes them suitable for everyday transactions.
Regulatory frameworks differ regarding consumer protections and fees. While federal law sets minimum expiration dates and limits dormancy fees for gift cards, prepaid cards are subject to more comprehensive regulations under the EFTA and Regulation E. These regulations provide stronger protections against unauthorized transactions and mandate clearer disclosures of fees, including activation, monthly maintenance, and ATM withdrawal charges. Although gift cards are technically a form of prepaid instrument, the CFPB differentiates between the two, noting their regulatory treatment and consumer protections vary.
Shared Characteristics
Despite their differences, gift cards and prepaid cards share several characteristics. Both types are “prepaid,” meaning funds are loaded before use. This eliminates the need for a credit line or bank account link.
Neither typically requires a credit check, making them accessible to many consumers. This provides financial tools for those who may not qualify for credit or prefer to manage spending without debt. Both can be subject to expiration dates, though federal regulations impose different terms on their application and disclosure. Both may carry fees, such as activation or inactivity charges, though the types and rules differ significantly.