How Your Business Can Accept HSA Payments

Health Savings Accounts (HSAs) are a popular tool for individuals to manage healthcare costs. An HSA is a tax-advantaged savings account designed for qualified medical expenses, available to those with high-deductible health plans. These accounts offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible medical expenses are also tax-free.

As HSAs become more common, businesses in healthcare and general retail encounter HSA debit cards as a payment method. Accepting these payments efficiently and compliantly is important for serving a broad customer base. This guide provides businesses with information to properly accept HSA payments, ensuring a smooth process for both the merchant and the customer.

Establishing the Ability to Accept HSA Payments

To process Health Savings Account (HSA) payments, businesses must first understand what constitutes a “qualified medical expense” according to the Internal Revenue Service (IRS). HSAs are designed for these expenses, and businesses should familiarize themselves with IRS guidelines. IRS Publication 502 defines medical expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any part or function of the body.

Payment processing relies on Merchant Category Codes (MCCs), which are four-digit numbers used by payment networks to classify businesses. For HSA payments, having the correct MCC assigned by your payment processor is important. Certain MCCs (e.g., for healthcare providers) automatically signal that transactions are likely for medical expenses, helping ensure HSA card transactions are recognized as legitimate.

Some merchants, such as drugstores, supermarkets with pharmacies, and general merchandise stores selling medical products, may need an Inventory Information Approval System (IIAS). An IIAS is a point-of-sale technology that verifies the eligibility of medical expenses at the time of purchase. This system integrates with a business’s inventory management to identify eligible medical products (by UPC or SKU) against a pre-established list.

The IIAS communicates with third-party administrators (TPAs) to validate purchases, ensuring only qualified medical expenses are paid with an HSA card. This system is crucial for merchants selling both eligible and ineligible items, as it helps prevent the purchase of non-eligible goods with HSA funds. Businesses in these categories must ensure their systems are IIAS-compliant or they may be unable to accept HSA cards.

Contacting your payment processor is a necessary step to confirm their ability to process HSA/FSA cards and ensure your merchant account is configured correctly. This involves verifying that the processor supports the specific authorization and settlement processes unique to these cards. A properly configured merchant account facilitates smoother transactions.

Developing clear internal policies and providing staff training are important for handling HSA payments effectively. Employees need to understand how to identify qualified products and services, especially for businesses not utilizing an IIAS, and how to address customer inquiries regarding HSA eligibility. Proper training helps ensure compliance and improves the customer experience.

Processing HSA Transactions

Processing HSA transactions largely mirrors standard debit or credit card transactions. Customers present their HSA debit card at the point-of-sale (POS) terminal.

For in-person payments, the process involves swiping, inserting the chip, or tapping the HSA debit card. If an Inventory Information Approval System (IIAS) is integrated, it automatically validates the purchase against eligible medical expenses during this transaction. The system checks each item to ensure it qualifies under IRS guidelines before payment authorization.

Online payments for HSA-eligible items follow a similar flow, where customers enter their HSA card details into an e-commerce platform. Businesses selling a mix of eligible and ineligible items online must configure their e-commerce system to distinguish between these categories. The system should prevent the purchase of non-eligible items with the HSA card, guiding the customer to use an alternative payment method.

During a transaction, the system initiates an authorization request to the HSA card issuer. This involves checking for sufficient funds and verifying purchase eligibility. A common reason for an HSA transaction to decline is insufficient funds, similar to a standard debit card.

Transactions may also decline if the expense is ineligible, due to a system error, or if the merchant’s MCC does not align with the service provided and an IIAS is not in place. If declined, the customer will need to provide an alternative payment method. Businesses should be prepared to explain the reason for the decline.

Situations may arise where HSA funds do not cover the entire cost. Businesses need to handle partial payments by processing available HSA funds first, then requesting the remaining balance from the customer using another form of payment. Many point-of-sale systems facilitate these split transactions.

Post-Transaction Responsibilities

After an HSA payment is processed, businesses have certain responsibilities. A significant aspect involves substantiation requirements, where customers prove their HSA funds were used for qualified medical expenses. Providing accurate documentation is crucial for the customer’s record-keeping and potential audits.

Businesses must provide clear, itemized receipts or statements. These should include the date, amount paid, and a descriptive breakdown of the service or product purchased. This detail is essential for the customer to substantiate their expense, confirming it aligns with IRS Publication 502 guidelines.

Maintaining accurate records of all HSA transactions is important for the business’s own accounting, reconciliation, and potential audit purposes. These records help ensure proper financial reporting and can be vital if there are any discrepancies or inquiries from payment processors or customers. Securely storing transaction data, whether digital or physical, supports efficient operations.

Handling returns and refunds for items purchased with an HSA requires specific procedures. When a customer requests a refund, it must be credited back to the original HSA card. Businesses should ensure their return policy and POS systems are configured to process these refunds correctly, directing funds back to the appropriate HSA account.

Businesses do not typically issue tax forms directly related to individual HSA transactions. However, providing accurate and detailed transaction records is important. These records empower customers to manage their own HSA tax reporting obligations, ensuring they have documentation needed to demonstrate withdrawals were for qualified medical expenses.