Flexible spending accounts (FSAs) provide patients with the ability to cover qualified medical expenses with tax-advantaged funds. These cards can only be used under certain conditions, and so they face higher rates of transaction failure than regular payment cards. Declined payment card transactions are awkward and frustrating for both customer and merchant.
The following are some common reasons why FSA cards are declined:
The FSA card hasn’t been activated
Happily, sometimes problems in life aren’t insurmountable challenges but just simple goofs caused by a lapse of memory. When an FSA card is declined, take a moment to consider first things first and ensure the cardholder already activated it.
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The account has insufficient funds to cover the purchase
Sometimes FSA cards are declined for the timeless classic reason of insufficient funds. Healthcare organizations don’t typically have any other way to deal with a patient without funds, other than to send the balance to collections.
The purchase includes items that are not FSA-eligible
FSA cards are not interchangeable with regular payment cards, and they must only be used for the purchase of approved items. There is sometimes a discrepancy between what the customer will understand to be approved and what actually is approved by both the benefit administrator and the Internal Revenue Service (IRS). The IRS 502 Publication provides a list of eligible medical expenses. Sometimes the distinction of what is covered from what isn’t covered isn’t very neat and tidy. For example, veterinary care for a dog who is a companion animal is not considered a qualified medical expense under IRS guidelines. However, the veterinary care for a trained medical service animal, such as a guide dog, would generally be considered a qualified medical expense under those same guidelines. Merchants will often need to explain the distinctions between eligible and non-eligible medical expenses when they are faced with a declined FSA transaction. It is thus useful to understand what the common misconceptions are for the types of charges billed by your establishment.
The merchant location does not use an inventory information approval system (IIAS)
Another common explanation for FSA card rejection is if the merchant is not using an inventory information approval system (IIAS). As defined by The Special Interest Group for IIAS Standards (SIGIS), an IIAS “requires a merchant’s inventory and point-of-sale systems to have the ability to verify that the merchandise being purchased with a FSA/HRA card is an eligible medical expense, as defined by the IRS.” This technology identifies eligible versus non-eligible expenses for the use of a tax-advantaged payment, and IIAS merchants are preferred by many FSA benefit administrators.
The Merchant Category Code (MCC) is not clearly medical
The Merchant Category Code (MCC) is a four-digit code used to categorize merchants by business type. Many FSA plan administrators will greenlight transactions based on the MCC if it signals a medical establishment, such as MCC 8062, Hospitals. The MCC can play a big role in whether or not a qualified expense is recognized as such during the FSA card transaction. For example, many merchants providing services for the aforementioned guide dog, such as a dog groomer, would not have a medical MCC even though the expense is considered medical under IRS guidelines. It is thus critical for healthcare establishments to know how their MCC may impact FSA card transactions.
The increasing number of self-pay patients means that merchants can expect more FSA transactions. The restrictions placed on these cards lead to a higher number of failed transactions, and healthcare organizations should be prepared to make it as easy as possible for patients to settle balances using their preferred method of payment.