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Part II
by Ken Sturm

    In a recent article in Transaction World, we discussed the multifaceted personality of the prepaid stored value debit card and touched upon one of the many uses of the vehicle for the ISO channel as a payroll card to replace traditional paper based checks. In this article we will touch upon a variety of health savings accounts that will further drive employers and employees to prepaid payroll debit cards. Such cards will be up to the task of assisting in administrating these accounts for the individuals that are the recipients of them.
   In 2003 as part of the Medicare bill that was passed, Congress implemented HSA legislation which allowed for employee contributions through a Section 125 “cafeteria” plan which allows for easy contribution management with both employees and employers able to make contributions, plus providing a tax break for both groups. The limit for annual contributions here is $2600; the HSA funds must be managed by an approved trustee and must be accessible by the employee at all times
    The big concept here is that employees can contribute pre-tax dollars to a type of account that is specifically geared towards medical services or prescriptions. While each plan has bonuses and pitfalls for the various participants, the fact is that for every dollar that an employee contributes to a health savings account, their employer will save at least 7.65% in payroll taxes for these pre tax contributions. This obviously can wind up to be a lot of money. For the moment these accounts come in several flavors:

Flexible Savings Accounts (FSAs)

    These accounts allow for employees to contribute pre tax dollars for healthcare, dependant care, disability coverage and even term life insurance expenditures. These accounts have been around for almost 20 years but they have not been too popular as there are claims that have to be filed for reimbursement of submitted claims. Employers pay for these administrative costs and current IRS regulations allow employers the ability to keep the unused employee funds that are not spent by year end. This is probably the single biggest hindrance to the program which is clearly illustrated by the fact that there are probably only 2-3 million employees enrolled in this type of program nationwide today.

Medical Savings Accounts (MSAs)

    These are similar to the FSA and have been likened to an individual owned 401k plan, and began in the late1990’s. Again employees of employers can pay for medical expenses with pre-taxed dollars. The big distinction is that the funds contributed to the MSA can accrue year after year with tax deferred status and are portable to each employee.

Health Reimbursement Arrangements (HRAs)

    These accounts are a hybrid of the first two account types and were created in the middle of 2002. These plans can be administrated by an employer or a third party plan service administrator and can be administrated in conjunction with an FSA which allows for some account building flexibility for the employees.
    From limited data, it appears that in 2003 approximately 300 million dollars were spent by more than 500 thousand MasterCard’s tied to Flexible Savings Accounts. There is an expectation that this number will approach almost 1billion dollars this year as more Visa card issuers join the fray. Almost 55% of the spending on these accounts occurs at pharmacies with the average transaction in slight excess of $50.
    With the continuing increases in HMO costs and more and more employers under pressure to either eliminate or curtail health related spending, we expect these market forces to propel growth of these medical benefits accounts over the next few years to double digits. Of course, there will be a great need for employer/employee education as there are many choices available and the merging of programs with employee deductibles and new rules evolving each year.
    If we remember the onset of the 401k plans and the amount of education that went into that push as it related to investments and the like, we can imagine a double dose as employees now begin receiving plastic cards versus paper checks.
    However the future is certainly bright for pre-paid card products to play an important role for employees and employers alike. The pre-paid debit card could have pursing functionality that would allow for medical expenses to be tracked and spent at specific MCC codes thereby eliminating much of the paperwork and tracking difficulties. The prepaid debit cards will reduce out of pocket costs for employees and lower administrative costs for their employers. In the small amount of industry data available today, it has been shown that plastic cards see employee participation in Health Savings Account schemes in excess of 20% higher enrollment rates than those of paper-based check wage programs.
    Even though we can expect the largest of U.S. issuers to push hard into payroll cards in the coming years, (think about the billions of dollars of assets that will need to be managed in these health accounts), there will still be plenty of opportunity for ISO’s to work with aggressive prepaid debit card issuers. Many of these prepaid card issuers have newer more robust processing technologies that are not tethered to old legacy platforms and can configure easily with new medical billing technologies that need to adjudicate the end user.
    For the ISO there will be new residual streams based on individuals as opposed to individual merchant accounts.