In today's world, debit cards are one of the most popular forms of payment to purchase consumer goods. They allow you to buy items online and in retail stores much quicker than cash or other methods.
Given that most people are familiar with debit cards and how they work, many third-party administrators and employee benefits software solutions promote the use of debit-like benefits cards instead of cash, checks, or expense reimbursements.
While using a benefits card may seem more convenient than paying for expenses out of pocket, it can come with its own challenges. In this article, we'll cover everything employers need to know about benefit cards and alternative solutions for your benefits administration.
Why do some employers prefer to card-based employee benefits?There are a few reasons why some employers are embracing a benefits card system.
More readily available technology
Much like technological advances have made remote work possible, employee benefit cards have become more prevalent in recent years thanks to software and HR tech improvements.
Benefits cards also give employees an easy way to use their perks while still giving employers and HR managers control over their budgets.
The rise in personalized benefits
The most significant reason organizations are adopting card-based benefits is the increasing desire for individualized benefits.
With a tight labor market following the Great Resignation, individualized perks are essential for attracting and retaining top talent. Traditional benefits such as group health insurance or on-site gyms don't have the same appeal or affordability as personalized benefits.
Instead of relying on these traditional benefits that provide the same offerings to everyone, you can provide personalized benefits that empower your employees to use benefits spend how they want.
A benefits card tied to a lifestyle saving account (LSA) or employee stipend provides employees with a personalized experience. However, there are other methods for offering these benefits.
What types of perks can you offer a benefits card for?
There's no limit to which types of expenses you can offer a benefits expense card for. This ranges from employer-sponsored stipends and LSAs for various taxable fringe benefits to tax-free options like health savings accounts (HSAs) and health reimbursement arrangements (HRAs).
Examples of fringe benefits that may be available include:
- Qualified transportation benefits (also called commuter benefits)
- Adoption benefits
- Education and tuition (such as the cost of books)
- Work-related expenses (such as the cost of tools)
- Meal vouchers
While the possibilities are endless, employers are often responsible for tracking any employment taxes from offering these benefits.
How does a benefits card work?
When your employees want access to funds to pay for an eligible expense online or in-person, they use their benefits card like a debit or credit card.
Some cards may require employees to run them as credit, but others allow them to create personal identification numbers (PINs) like they would for a debit card.
While many service providers issue physical cards, virtual cards are also an option. Employees can use their employer-funded account to pay for the benefits card transaction if they have adequate funds.
Some solutions only work if your employees use their cards at an approved vendor, while others use more advanced systems to determine which purchases are eligible or ineligible according to IRS guidelines and employer-set rules. However, this generally only works if your employees aren't trying to buy other items alongside approved ones in the same transaction.
Some providers offer a mobile app allowing employees to scan items to determine if the product is eligible under your plan.
Depending on the perks included as part of your benefit plans, your employees may have taxable and tax-free expenses. Any taxable benefits must be reported as income on your employees' Form W-2s.
If you offer your employees an HSA, their HSA card will be connected to their individual HSA accounts at their financial institution. Employees who need a replacement card can get one from the service provider.
Pros of using cards with your benefits programThere are many advantages to using a card-based solution for your personalized benefits package.
Faster for your employees
Using a benefits card can be quicker for your employees than other methods of providing personalized benefits. With a reimbursement model, employees must spend their own money first, then submit a request for reimbursement from their allowance.
A card-based solution allows employees to skip this step in many cases, though they may still need to hold onto receipts.
Higher benefits utilizationBecause most consumers are familiar with debit and credit cards, they will likely use their new card-based benefits. There's a smaller learning curve than with other solutions.
Cons of using benefit cardsWhile there are many advantages of using benefit card-based programs, there are also disadvantages compared to reimbursement methods.
They can require employees to submit manual claims
To maintain compliance with certain tax-free benefits, such as HRAs, employees must submit proper substantiation each time they use their card.
Acceptable forms of “proper substantiation” will depend on what your worker is trying to buy. If they want to use their card for over-the-counter drugs, they'll need to get a doctor's prescription and a receipt from the pharmacy to submit to the third-party administrator.
While some IIAS-compliant pharmacies can bypass the manual claim requirement, most benefits providers still require it, making things much more confusing for your workers.
All of this burdens you and your HR department if they don't submit the required information. It's then up to you to get it from them for their transactions to be compliant with IRS requirements.
With non-medical expenses, certain providers still require random documentation checks to ensure employees use their cards correctly. This can create problems if your employees can use their allowances on ineligible items.
Not everyone accepts virtual cards or benefits cards
Even if your worker is trying to pay for a qualified product or service, some businesses won't allow them to use their virtual or physical benefits debit card.
Another issue that might arise is that some places will accept their benefits card even if they’re buying things that aren't qualified.
For example, let's say your worker picks up some snacks at the pharmacy while waiting to pick up a prescription, and they accidentally swipe their benefits card instead of their personal bank card. That payment may go through at the time of purchase, and your employee will be responsible for paying that unauthorized charge back into their account.
Cards can't process payments over the allowance amount
What happens if your worker has a charge that's more than the amount remaining on their benefit card? The card simply gets declined if they don't create separate purchases for the remaining amount and the excess.
So even if they still have $100 left on their card, if they try to pay for a product or service that costs $115, the card won't process the payment unless they request a split payment.
Employees must keep a close eye on how much money their cards have on them. Otherwise, they could end up with no way to pay for what they need. You'll need to educate your employees on how their cards work to avoid these scenarios from happening.
HRA compliance and personalization can be more challenging
If an employer offers an HRA, they have all sorts of options to personalize the HRA for their employees’ unique needs. However, these personalizations aren’t always allowed when used with a debit card.
For example, with an HRA debit card, you may be unable to vary the allowance amounts for different classes of employees. So if you want your full-time employees to have a certain allowance while your part-time employees have another, an HRA debit card may not work.
What’s more, if you want a premium-only HRA that doesn’t cover any additional medical expenses, employers may be unable to restrict the card’s usage to allow for this.
Other alternatives to benefits cards
As mentioned previously, there are other methods for providing your workers with personalized benefits. One of the most popular methods is by offering benefits on a reimbursement model with the assistance of software like PeopleKeep.
If you are seeking the convenience of cards and want to avoid the complications that come with benefits cards, offering benefits through reimbursement with the assistance of administration software is a great option. A good administrative tool will give your benefits plan administrator the training and ongoing support needed to keep your perks compliant and functioning smoothly.
Employees can request reimbursement through the software when they incur a qualifying expense. Once approved, you can cut your employees a check or apply the amount to their next paycheck. With PeopleKeep, employers usually only spend a few minutes each month managing their benefits.
Employee benefit cards are a new way to provide personalized benefits to your employees through stipends or LSAs. As with any tool, there are several card benefits, but there are also disadvantages. You'll need to consider your organization's needs and which types of benefits you want to offer to determine whether a benefits card is right for you.
If you're looking to offer personalized benefits without the hassle, PeopleKeep can help. Our benefits administration platform makes it easy to set up and manage HRAs and stipends in minutes each month.
This blog article was originally published on February 8, 2021. It was last updated on April 10, 2023.