How to Accept HSA Cards for Your Business

Health Savings Accounts (HSAs) offer a tax-advantaged way for individuals to pay for qualified medical expenses, making their associated debit cards a valuable payment method for many consumers. Businesses, especially those in the healthcare sector, can benefit significantly from accepting HSA cards, as it expands their customer base and streamlines transactions for cardholders. Understanding the specific regulations governing HSA card acceptance is paramount for businesses to ensure compliance with Internal Revenue Service (IRS) guidelines. This understanding helps businesses properly categorize their offerings and configure their payment systems to facilitate these specialized transactions.

Understanding HSA Card Acceptance Fundamentals

HSA cards function similarly to standard debit cards but are specifically restricted to “qualified medical expenses” as defined by the IRS. Businesses accepting these cards must grasp this fundamental difference. Payment processors initially categorize businesses using Merchant Category Codes (MCCs), which broadly classify the type of goods or services offered. For businesses whose primary function is healthcare, such as doctors’ offices or hospitals, their MCC might inherently qualify them to accept HSA cards without extensive additional setup.

However, merchants selling a mix of eligible and ineligible items, like pharmacies or grocery stores, often need an Inventory Information Approval System (IIAS) or must qualify under the “90% Rule.” An IIAS is a point-of-sale system that can identify eligible medical expenses at the item level during a transaction, ensuring compliance with IRS regulations. Alternatively, the 90% Rule applies to certain merchants, typically drug stores or pharmacies, where at least 90% of their gross sales consist of eligible medical expenses, primarily prescriptions and qualified over-the-counter items.

Identifying Eligible Expenses for HSA Payments

Determining what constitutes a “qualified medical expense” is crucial for businesses accepting HSA cards. The IRS provides comprehensive guidance on this in Publication 502, “Medical and Dental Expenses.” This publication defines eligible expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. Examples of commonly eligible expenses include prescriptions, doctor visits, dental care, vision care, medical devices, and certain over-the-counter medications.

Many services and products are eligible, such as acupuncture, ambulance services, artificial limbs, and chiropractic care. The CARES Act, effective January 1, 2020, expanded eligibility to include over-the-counter drugs without a prescription and menstrual care products. However, expenses generally not considered eligible include cosmetic procedures not for medical necessity, general health items not prescribed for a specific medical condition, and personal care items like soap or toothpaste. Businesses must categorize their products and services in alignment with these IRS definitions, ensuring clear itemization for customers to verify eligibility.

Configuring Your Payment System for HSA Cards

Setting up a payment system to accept HSA cards involves specific steps to ensure IRS compliance. The initial step for any merchant is to contact their current payment processor to inform them of the intent to accept HSA cards. The payment processor will help ensure the business is assigned an appropriate Merchant Category Code (MCC) that identifies it as a healthcare provider or a business that sells health-related goods. Examples of qualifying MCCs include those for doctors, dentists, optometrists, hospitals, and pharmacies.

For businesses selling both eligible and ineligible items, implementing an Inventory Information Approval System (IIAS) is necessary. This system integrates with the point-of-sale (POS) system to automatically identify and separate qualified medical expenses. Alternatively, certain drug stores and pharmacies can use the 90% Rule, which allows automatic approval of HSA transactions if 90% or more of their gross sales are from eligible medical expenses. Businesses operating under this rule must register with SIGIS annually and attest to meeting IRS requirements. Updating POS software and hardware to be IIAS-compatible or to support the 90% Rule is a technical requirement, ensuring transactions are processed correctly and can handle partial payments or declines.

Processing HSA Card Transactions and Maintaining Compliance

When processing HSA card transactions, the system’s configuration dictates the flow at the point of sale. For IIAS-enabled merchants, the system automatically identifies eligible items in a customer’s basket, separating them from ineligible purchases. If a transaction includes both eligible and ineligible items, the IIAS system facilitates a split payment, where the HSA card pays for the qualified medical expenses, and another form of payment is required for the remaining ineligible items. This process helps prevent declines due to ineligible items and simplifies compliance for both the merchant and the cardholder.

Partial approvals or declines can occur if the transaction amount exceeds the available HSA funds or if ineligible items are attempted. Merchants should have a clear procedure for handling these situations, typically by prompting the customer for an alternative payment method for the remainder or for the entire transaction if it is declined. Refunds for HSA purchases must always be returned to the original HSA card to maintain the tax-advantaged nature of the funds. Accurate record-keeping is paramount for merchants, who should maintain detailed records of HSA transactions, including dates, amounts, and item descriptions. Ongoing compliance requires merchants to stay informed about changes in IRS rules regarding qualified medical expenses, regularly updating their systems and product categorization to reflect these adjustments.