Rising healthcare costs have people more actively managing their healthcare expenses. Many are doing so with the help of consumer-directed healthcare (CDH) resources like Flexible Spending Accounts (FSA) and Limited Purpose Flexible Spending Accounts (LPFSA). To increase employee utilization of these accounts, it’s important to provide education on FSA and LPFSA basics regularly throughout the year.
Flexible Spending Account Basics
A standard FSA is a health benefits account to which participants contribute money deducted from their paychecks before payroll tax calculation. It’s a popular option in employer-sponsored benefits packages. For 2024, the maximum FSA contribution limit is $3,200.
FSA funds can pay for a long list of qualified healthcare services and products. The IRS decides which healthcare expenses are eligible for FSA payments, and that list doesn’t often change. For example, in 2011, over-the-counter (OTC) drugs and medications were made ineligible as a move by Congress to help fund the Affordable Care Act (ACA). However, in 2020, OTC products became eligible again to provide some financial relief in response to the pandemic. The IRS also added menstrual care products to the list of eligible products for the first time. Since then, there has been one further change, in March 2021, when COVID-19-related Personal Protective Equipment (PPE) became eligible.
Below is a list of everyday healthcare expenses and their eligibility status for full FSA accounts.
- Alcoholism and drug addiction treatment
- Ambulance services
- Annual physical examination
- Body scan (electronic)
- Counseling therapy
- 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 individuals
- Nursing home and services
- Organ transplants
- Physical therapy
- Psychiatric care
- Smoking cessation programs
- Special education
- Transportation expenses for medical treatments and services
- Weight loss program (requires a medical letter of necessity)
- Artificial teeth
- Birth control and contraceptive devices
- Braille reading material
- Breastfeeding supplies/lactation expenses
- Capital expenses (home improvements that accommodate a disabled person)
- Communication equipment for deaf/speech impaired
- Contact lenses and eyeglasses
- Co-pays, co-insurance, and deductibles
- COVID-19 PPE (Hand sanitizers, wipes, and masks)
- Crutches (purchased or rented)
- Diagnostic devices (blood sugar monitors, blood pressure monitors, etc.)
- Guide dogs or other service animals
- Hearing aids (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 (artificial limbs, breast reconstruction, etc.)
- Smoking cessation aids (nicotine gum and patches)
- Wigs to conceal hair loss caused by a disease or medical treatment
- Vehicular expenses (for operational and design costs that accommodate a disabled person)
Common Healthcare Expenses that are NOT FSA-Eligible
- Babysitting, childcare, or nursing care for a 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
Is IRS Approval Required?
The IRS decides which products and services are eligible for purchase or payment using FSA funds. Guidance is available in IRS Publication 502, Medical and Dental Expenses:
Medical expenses include the costs of diagnosis, cure, mitigation, treatment, or prevention of disease and the costs for treatments affecting any part or function of the body. Services must be legal in the U.S. and rendered by physicians, surgeons, dentists, and other medical practitioners. In addition, they include equipment costs, supplies, and diagnostic devices needed for these purposes.
Since eligible medical care expenses must primarily alleviate or prevent a physical or mental defect or illness, they don’t include products and services that benefit general health, like vitamins, supplements, or cosmetic improvements.
FSA-eligible products can be purchased from pharmacies, grocery and department stores, and online retailers such as FSAStore.com, among others.
Some Important Notes About FSA Usage
- Many FSA plans come with convenient debit cards, which help reduce the need to file reimbursement claims.
- When participants pay for expenses with a debit card, they may need to provide receipts to verify the expense or in the case of an IRS audit.
- FSA account funds can pay for the expenses of participants and their tax dependents. Tax dependents do not have to be legally related, within a specific age range, or covered by the employee’s insurance policy. However, they do have to meet dependency rules as defined by the IRS.
- As directed by what is known as the Uniform Coverage Rule, an employee may access their entire FSA amount on the first day of the plan year. That person will make equal and regular contributions to the account throughout the year until the contributions resolve the debt. For example, a participant elects an annual contribution of $2,500. They incur a qualified $2,500 expense on the first day of the plan year. The entire FSA balance is available to use in paying that expense. Then the employee reimburses the account the $2,500 with equal installment payroll deductions during the plan year.
Limited Purpose FSA Basics
A Limited Purpose FSA is like a full FSA but can only pay for eligible vision and dental expenses. However, unlike the full FSA, an LPFSA can be paired with a Health Savings Account (HSA). This LPFSA/HSA pairing can further reduce taxes while allowing participants to build up their HSA balance for other purposes. As the LPFSA funds are only available to cover dental and vision expenses, HSA funds are freed up for paying medical expenses or rolling over as HSA savings. Unused HSA balances can be used for future healthcare expenses and, eventually, to supplement retirement funds.
The maximum LPFSA contribution limit for 2023 is $3,050.
Who is Eligible?
Under current IRS rules, you cannot contribute to an HSA and a standard FSA at the same time. However, because an LPFSA restricts reimbursements to dental and vision care expenses, the IRS allows you to contribute to both an LPFSA and an HSA at the same time. Having both accounts enables participants to maximize tax and savings benefits.
How Does It Work?
A Limited Purpose FSA works just like a full FSA, with fewer eligible expenses. Participants allocate a specified amount of money as recurring payroll deductions for deposit into an LPFSA account. Like standard FSAs, that amount is subject to an annual IRS limit. Qualified expenses include eye exams, eyeglasses, contacts, regular dental checkups, fillings, crowns, braces, and more. As with an FSA, participants’ spouses and dependents may also use LPFSA funds.
Depending on how an LPFSA is structured, some participants may carry over unused money into the following year.
On the flip side, should LPFSA funds be exhausted before the plan’s current year ends, your administrator may automatically reimburse any further claims from a participant’s HSA without specific authorization. As such, confirming in advance how administrators handle excess LPFSA claims is a good idea.
Is “Double-Dipping” Allowed?
It’s crucial to understand that funds from a limited-purpose FSA and an HSA may not pay for the same eligible expense. This is known as double-dipping and is prohibited. Participants must decide which account to use for reimbursement. Also, because LPFSA funds are pre-tax, reimbursed expenses are not also eligible as medical deductions on tax returns. To avoid mistakes, remember that the IRS deems expenses as eligible on the day you receive the service, not the billing or paid dates.
DataPath, Inc. creates innovative solutions for tax-advantaged benefits administration, including FSAs, HRAs, HSAs, LSAs, COBRA, and more. Please enter your email (above right) to receive notifications of newly published blog articles.