What are HSA/FSA Card Payments?

How HSA and FSA Cards Work

HSAs and FSAs are tax-advantaged accounts in the US that let employees set aside pre-tax dollars for medical expenses. HSAs are paired with high-deductible health plans, are owned by the employee, and roll over year to year. FSAs are employer-sponsored, are typically use-it-or-lose-it within the plan year, and don't require a high-deductible plan.

Both account types issue payment cards (often branded with Visa or Mastercard) that the employee can use at the point of sale. The card looks and works like a normal debit card, except that it's restricted to qualifying medical expenses. Spending outside the eligible categories is treated as a non-qualified distribution: taxable, and on HSAs subject to a 20% penalty if the account holder is under 65.

What Counts as Eligible

Eligibility is governed by Section 213(d) of the Internal Revenue Code, which defines medical expenses for tax purposes. The list includes:

• Doctor, dentist, and specialist visits
• Hospital and surgery costs
• Prescription medications
• Many over-the-counter medications and health products (expanded by the CARES Act in 2020)
• Vision care including glasses, contacts, and exams
• Dental treatments including most cosmetic exclusions
• Mental health treatment
• Medical equipment, supplies, and diagnostic devices
• Certain preventive care items

The CARES Act in 2020 expanded eligibility to include menstrual care products and many over-the-counter medications without a prescription, which were previously restricted.

Merchant Category Codes (MCCs)

The card networks identify merchants by Merchant Category Code (MCC). HSA and FSA card administrators use MCCs as the first filter for whether a transaction can be approved. Common medical-related MCCs include:

• 4119: Ambulance services
• 5912: Drug stores and pharmacies
• 5975: Hearing aids
• 5976: Orthopedic goods
• 8011: Doctors and physicians (not elsewhere classified)
• 8021: Dentists and orthodontists
• 8031: Osteopaths
• 8041: Chiropractors
• 8042: Optometrists and ophthalmologists
• 8043: Opticians, optical goods, and eyeglasses
• 8049: Podiatrists and chiropodists
• 8050: Nursing and personal care facilities
• 8062: Hospitals
• 8071: Medical and dental laboratories

Cards are typically configured to allow transactions automatically at these MCCs. Transactions at other MCCs may be declined or require additional substantiation.

The IIAS

For merchants that sell a mix of eligible and ineligible items (drug stores, supermarkets with pharmacies, big-box retailers), MCC alone isn't enough. A drug store might sell prescription drugs (eligible) and candy bars (not eligible) in the same transaction. The IRS doesn't allow the FSA or HSA to pay for the candy.

The Inventory Information Approval System (IIAS) is the solution. Merchants that sell mixed inventory must implement IIAS at the point of sale. The system identifies each individual item by SKU, checks it against an eligibility list maintained by the merchant in coordination with SIGIS (Special Interest Group for IIAS Standards), and only allows the FSA or HSA card to pay for the eligible items in the basket.

The IRS requires IIAS for any merchant that sells items beyond the strictly medical categories and wants to accept FSA cards without manual substantiation. Without IIAS, the FSA administrator has to substantiate every transaction after the fact, asking the cardholder for receipts and rejecting non-qualifying purchases retroactively.

Substantiation

Even with IIAS in place, FSA administrators are required to substantiate transactions to confirm they were for eligible expenses. Substantiation can come from:

• IIAS data automatically transmitted with the transaction
• Co-payment matching against the employer's health plan
• Recurring expense matching for monthly prescriptions or known providers
• Cardholder-submitted receipts when none of the above apply

If a transaction can't be substantiated, the FSA administrator typically blocks the cardholder from further FSA card use until they provide a receipt or repay the unsubstantiated amount.

HSA vs FSA Differences That Affect Payments

HSAs and FSAs work similarly at the point of sale but have key differences:

• Ownership: HSAs belong to the individual; FSAs belong to the employer.
• Carryover: HSA funds roll over indefinitely; FSA funds typically don't (with limited carryover or grace period options).
• Contribution limits: Different annual limits set by IRS each year.
• Substantiation rigor: FSAs require strict substantiation under IRS rules. HSAs put the substantiation burden on the account holder at tax time, so HSA cards function more like regular debit cards with weaker merchant-side controls.

Most HSA/FSA cards are issued through specialized administrators (HealthEquity, WageWorks, Optum Bank, others) rather than retail banks.

What Merchants Need to Know

To accept HSA and FSA cards effectively:

• Confirm your MCC is on the eligible list, or that your products qualify for IIAS coverage
• If you sell mixed inventory, implement IIAS through your POS provider and register with SIGIS
• Maintain accurate item-level data for SIGIS eligibility lists
• Provide receipts in formats that support cardholder substantiation
• Train staff to handle declined transactions and customer questions about eligibility

Healthcare-specific merchants (medical practices, dental offices, optical shops, pharmacies) generally have it easier: their MCC alone qualifies them and most or all of their inventory is eligible by default.