According to the International Foundation of Employee Benefit Plans Employee Benefits Survey, more than 61 percent of plan sponsors offer a flexible spending account (FSA) to their participants. As medical costs continue to rise, we all want to save on health care, dental or vision expenses wherever we can, and FSAs offer a way to reduce out-of-pocket costs and save on taxes.

If you offer a plan, communicating the value of the FSA along with explaining the details of reimbursable expenses, the timing of electing coverage and the use-it-or-lose-it rules are vital to ensuring that plan participants understand how to use an FSA to their advantage. 

Qualified and Nonqualified FSA Expenses

For plan participants, understanding what qualifies as an eligible expense is critical. Covered expenses are those that are incurred during the plan year, not from a prior or future year. Qualified (or what the Internal Revenue Service (IRS) calls includible) expenses eligible for reimbursement are those approved by the IRS and described in IRS Publication 502. This listing details both eligible and ineligible expenses. Below are a few notable expenses that aren’t eligible for reimbursement:

• Concierge medical fees—Some primary care physicians charge an annual fee or retainer paid in advance of any medical services. This type of charge is not eligible. However, when medical services are actually received, the copay and/or charge for service are eligible expenses.
• Controlled substances—Drugs such as marijuana are not eligible because they are illegal under federal laws, even if legal under some state laws. Similarly, cannabidiol (CBD) oil products are not eligible.
• Imported medicines and drugs—Imported medicine bought in or ordered and shipped from another country are not eligible. However, if the Food and Drug Administration (FDA) determines a prescribed drug can be legally imported, the drug would generally be considered eligible.
• Insurance premiums—Premiums for health, dental, vision and life insurance are not eligible. Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums are also not eligible.
• Nonprescription drugs—Medicine that isn’t prescribed is not eligible. A prescribed drug is one that requires a prescription from a doctor in order to purchase the drug. For example, if a doctor recommends taking a daily aspirin, it is not eligible as a medical expense because a physician’s prescription is not required to purchase the aspirin.
• Nutritional supplements—The cost of nutritional supplements, vitamins, herbal supplements, etc., are not eligible unless they are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.
• Smoking cessation—Drugs such as nicotine gum or patches designed to help stop smoking are not eligible unless prescribed by a physician.
• Teeth whitening—In Publication 502, the term medical expenses generally includes dental expenses, however, teeth whitening is not eligible. Teeth whitening and various other cosmetic medical procedures are not eligible because they don’t “promote the proper function of the body or treat illness or disease.”
• Weight loss programs—Medical expenses with the purpose of improvement of appearance, general health or sense of well-being are not eligible. Expenses for treatment of a specific disease when diagnosed by a physician are eligible. For example, the membership dues of a health club are not eligible, but charges for specific weight-loss activities at the health club generally are eligible.

Health Savings Accounts—No Double-Dipping!

If you offer a high-deductible health plan (HDHP) with a health savings account (HSA), participants are only eligible to open a limited-purpose FSA, for dental and vision expenses exclusively. If a participant contributed previously to an HSA but is now on a different health plan that is no longer HSA-eligible, he or she would qualify for a traditional FSA. But remember, there is no double-dipping! Expenses already paid or reimbursed from an HSA are not a qualified expense for the FSA.

Also, participants should be reminded to keep documentation of medical, dental, and vision expenses with their tax records to support deductions (although the supporting documents are not sent to the IRS with returns). IRS Publication 969 details more about the relationship between FSAs and HSAs.

Timing of Electing Coverage With an FSA

FSA elections are required every year prior to the beginning of the plan year and remain in place—without changes—for the duration of the year. 

Use-It-or-Lose-It Rules

FSAs are generally use-it-or-lose-it plans. Participants should determine an amount to save that is large enough to cover potential expenses, but not too large so that unused funds are forfeited at the end of the plan year. To help with this dilemma, your FSA vendor may offer a calculator or estimator tool to help participants select an election amount.

In addition, plan sponsors can offer either a grace period or a carryover to extend the plan year, but are not required to offer either one. A plan can provide a grace period of up to 2 ½ extra months to use money remaining in the FSA from the previous year, or the plan can allow up to $500 per year to be carried over to use in the following plan year.

Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans

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