Rising healthcare costs, which have helped spark the continuing rise in consumer-directed healthcare (CDH), may have you more actively managing your healthcare expenses. One CDH resource, Flexible Spending Accounts (FSAs), can help you save taxes on the money you spend out-of-pocket for healthcare expenses — the ones insurance doesn’t cover, or your share after insurance has paid its part.
An FSA is a benefits account to which you contribute pre-tax funds (money that is deducted from your paycheck before taxes are calculated). It’s a popular option in many employer-sponsored benefits packages. FSA funds can be used for a long list of qualified healthcare services and products. To use the account efficiently, you need to become familiar with which expenses are eligible and not eligible.
The IRS determines which healthcare expenses are qualified for FSA accounts, and the list doesn’t change very often. However, in 2020, as part of the COVID-19 pandemic response, the IRS again qualified over-the-counter (OTC) drugs and medications, which were removed from the list in 2011 as part of the Affordable Care Act legislation. Menstrual care products were also added for the first time. Then, in March 2021, COVID-19 related Personal Protective Equipment (PPE) was added to the list as well.
Below is a list of common healthcare expenses and their current eligibility status, for your reference.
FSA Eligible Expenses
FSA Eligible Expenses – Services
- Alcoholism and Drug Addiction treatment
- Ambulance services
- Annual physical examination
- Body scan (electronic)
- Dental treatments (most)
- Disabled dependent expenses for medical care
- Eye exams
- Eye surgery
- Fertility treatments
- Home for the Intellectually and Developmentally Disabled
- Hospital services (including meals and lodging)
- Laboratory fees (associated with medical care)
- Lead-based paint removal
- Long-term care and services for chronically ill individual
- Nursing home and services
- Organ transplants
- Psychiatric care
- Smoking cessation programs
- Special education
- Transportation expenses for medical treatments and services
- Weight loss program (requires medical letter of necessity)
FSA Eligible Expenses – Products
- Artificial teeth
- Birth control and contraceptive devices
- Braille reading material
- Breast feeding supplies/lactation expenses
- Capital expenses (home improvements that accommodate a disabled person)
- Communication equipment for the deaf or speech impaired
- Contact lenses and eyeglasses
- Co-pays, co-insurance, and deductibles
- COVID-19 PPE (Hand sanitizers, wipes, and masks for personal use)
- Crutches (purchased or rented)
- Diagnostic devices (blood sugar monitors, blood pressure monitors, etc.)
- Guide dog or other service animals
- Hearing aid expenses (batteries, repairs, and maintenance)
- Insulin and diabetic supplies
- Medical Conference expenses (if related to personal chronic illness)
- Menstrual care products
- Over-the-counter (OTC) medications
- Oxygen and oxygen equipment
- Pregnancy test kits
- Prescription drugs and medicine
- Prosthesis (including artificial limbs and breast reconstruction surgery)
- Smoking cessation aids (OTC medicines such as nicotine gum and patches)
- Wigs used to conceal hair loss from a disease or medical treatment
- Vehicular expenses (for operational and design costs that accommodate a disabled person)
NOT FSA Eligible Expenses
- Babysitting, childcare or nursing for healthy baby
- Controlled substances that are illegal under federal law, like marijuana, laetrile, etc.
- Cosmetic surgery that does not fix/treat deformity or illness like a facelift, liposuction, etc.
- Dancing lessons
- Diaper services that do not manage the effects of a disease
- Funeral expenses
- Future medical care
- Hair transplant or removal
- Health club dues
- Household help
- Illegal operations and treatments
- Insurance premiums
- Maternity clothes
- Medicines and pharmaceuticals from another country
- Nutritional supplements
- Swimming lessons
- Teeth whitening
- Veterinary fees for animals not qualified as service or support
FSA Eligible Expenses Require IRS Approval
The IRS decides which products and services are eligible for purchase or payment using FSA funds. Guidance for eligible expenses is included in IRS Publication 502, Medical and Dental Expenses:
Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Where Can I Buy FSA Eligible Items?
FSA-eligible products can be found in pharmacies, grocery stores, and department stores such as Walmart and Target. Often, they are marked with special signage. You can also visit online specialty retailers such as FSAStore.com* for convenient purchase and delivery options.
Some Important Notes About FSA Usage
- Many FSA plans come with debit cards for easy shopping and you often don’t even need to submit purchase receipts.
- Always keep the receipts for your purchases. You may need to submit purchase documentation, even if you used a debit card, and you will need it to verify healthcare expenses if the IRS should audit you.
- Your FSA account funds can be used on expenses for you and your tax dependents, which normally include your spouse and children, if not other relatives. Tax dependents do not have to be within a certain age range or covered by your insurance policy. You just have to be financially responsible for them as defined by IRS tax dependent rules.
- Thanks to what is known as the Uniform Coverage Rule, you have access to the full amount of your annual FSA contribution from the first day of the plan year, even though you are paying the contribution into your account in equal installments over the year. If you elect an annual contribution of $2,500, and you have a qualified $2,500 expense on the first day of the plan year, you can use your entire FSA to pay that expense. Then you will pay it back over the course of the plan year as you may contributions out of each paycheck.
To learn more about FSA accounts, contact your third-party administrator or HR department.
*DataPath may be compensated for items bought through our partners.