What Is an HSA/FSA Card and How Does It Work?

Health Savings Account (HSA) and Flexible Spending Account (FSA) cards offer a convenient way to manage healthcare costs using pre-tax funds. These specialized payment cards function like a standard debit card, providing direct access to funds set aside in your health savings or flexible spending account. They simplify payments for eligible medical expenses, allowing individuals to efficiently utilize their tax-advantaged accounts for a wide range of health-related services and products.

Understanding Your HSA/FSA Card

An HSA or FSA card is a payment card, typically bearing a major card network logo, directly linked to your health savings or flexible spending account. When used at a point of sale, it functions similarly to a debit card for qualified medical expenses. While many transactions do not require a Personal Identification Number (PIN), some merchants or card issuers may prompt for one.

These cards are issued by the plan administrator, which could be a bank, a third-party administrator, or your employer, depending on your health benefits structure. HSA and FSA accounts have distinct characteristics. HSA funds are owned by the individual and roll over year to year, remaining available even if you change employers. FSA funds are typically employer-sponsored and generally operate on a “use-it-or-lose-it” basis, though some plans may allow a limited carryover or a grace period into the next plan year.

The card “knows” if an expense is eligible through specialized merchant systems. The most common is the Inventory Information Approval System (IIAS), which identifies eligible healthcare items at the point of sale by comparing product codes against an IRS-approved list of qualified medical expenses. This system allows for real-time verification, often enabling split-cart transactions where eligible items are paid with the health card and ineligible items with another form of payment.

Some pharmacies and drug stores may operate under a “90% Rule,” exempting them from needing an IIAS system if most of their sales are eligible medical expenses. If a merchant does not have an IIAS system or qualify under this rule, the transaction may be declined due to IRS regulations.

Eligible Expenses and Usage Guidelines

The Internal Revenue Service (IRS) defines “qualified medical expense” for HSA or FSA funds. According to IRS Publication 502, these are costs primarily incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. This broad definition covers healthcare services and products for yourself, your spouse, or qualified dependents.

Common eligible expenses include:
Doctor visits
Hospital stays
Prescription medications
Copayments
Dental care (fillings, cleanings, orthodontia)
Vision care (eye exams, eyeglasses, contact lenses)
Certain medical equipment (crutches, wheelchairs, CPAP machines) if medically necessary.

The CARES Act in March 2020 made over-the-counter (OTC) medications and menstrual care products eligible without a prescription. This expanded eligibility includes pain relievers, cold and flu medicines, allergy medications, antacids, and first-aid supplies. However, general health items or those not primarily for medical care, such as cosmetic procedures, teeth whitening, general health supplements (unless medically necessary and prescribed), and health club dues, are not eligible.

If direct card usage is not possible, such as at merchants without an IIAS system, you would typically pay out-of-pocket and then submit a claim for reimbursement, providing necessary documentation like an itemized receipt. Using funds for non-qualified purchases can result in the amount being included in your taxable income, potentially incurring a 20% penalty from the IRS if you are under age 65.

When using the card, ensure only eligible items are scanned for payment. At pharmacies or doctor’s offices, the process is usually straightforward as most services and products are medically related. Always verify eligibility if unsure, as plan administrators and the IRS maintain comprehensive lists of qualified expenses.

Substantiation and Record Keeping

Substantiation is verifying that a purchase made with an HSA or FSA card was for a qualified medical expense, as required by IRS regulations and your plan administrator. This step ensures tax-advantaged funds are used appropriately and prevents misuse. The IRS mandates that all claims must be substantiated, even those made with a debit card, though some transactions can be automatically substantiated at the point of sale.

For transactions not automatically substantiated, such as those at merchants without an IIAS system or for services like doctor visits, the plan administrator will typically request documentation. This documentation usually includes an itemized receipt detailing the service or product, date of service or sale, and expense amount. For medical services, an Explanation of Benefits (EOB) from your insurance provider is often required, providing details like the patient’s name and the provider’s name.

If a transaction cannot be substantiated, or if the expense is deemed ineligible, the plan administrator may require you to repay the ineligible amount. Failure to provide requested documentation or repay ineligible amounts can lead to your card being suspended, preventing further use. Promptly respond to any substantiation requests from your administrator.

Maintaining thorough records for all HSA and FSA transactions is important for tax purposes and in the event of a potential IRS audit. These records should include itemized receipts, EOBs, and any other supporting documentation like a Letter of Medical Necessity for dual-purpose items. While some HSA providers offer digital tools for receipt storage, keeping both physical and digital copies is a sound practice.

It is recommended to retain these records for a minimum of three years after the tax return was filed for the year the expense was incurred or reimbursed, as this is typically the period a tax return remains open to audit. Some advisors suggest keeping records for up to seven years for added security. Organized record-keeping ensures you can prove the eligibility of your expenses if questioned, helping to avoid income tax and potential penalties on previously tax-free distributions.