Can You Use an FSA for Medical Bills?

Flexible Spending Accounts (FSAs) provide a tax-advantaged way for individuals to manage healthcare expenses. By setting aside pre-tax dollars, employees can reduce their taxable income while maintaining funds specifically for medical costs. These accounts offer immediate access to cash for eligible expenses throughout the year.

Eligible Medical Costs

FSAs cover a broad range of medical expenses necessary for the diagnosis, treatment, or prevention of disease, as defined by IRS guidelines. This includes payments for services by healthcare professionals such as doctors, dentists, and optometrists, as well as costs related to hospital care, surgeries, and prescription medications.

Certain over-the-counter medications and health-related products are also eligible. Items like bandages, contact lens solutions, and high-SPF sunscreen qualify. Additionally, menstrual care products and specific over-the-counter drugs without a prescription are covered, offering more flexibility in how FSA funds can be used.

Transportation costs related to medical care, such as mileage for driving to and from appointments, are eligible as well. The IRS updates the standard medical mileage rate annually. Costs for medical equipment, such as crutches or blood sugar test kits, are also covered if they are primarily for medical care.

Reimbursement Steps

To claim reimbursement, individuals must first ensure their expense qualifies under IRS guidelines. Necessary documentation, such as itemized receipts or invoices, should be collected. These documents must include details like the nature of the service or product, the provider’s name, and the amount paid.

Reimbursement claims are submitted to the FSA administrator, usually through an online portal or physical forms. Deadlines and submission guidelines must be followed to avoid delays or denials. Many administrators offer direct deposit options for faster processing.

Non-Qualified Expenses

FSAs do not cover all expenses. Cosmetic procedures, such as elective surgeries or dental veneers, are ineligible as they are considered non-essential medical care.

General health-related expenses, like gym memberships or vitamins, are typically excluded unless tied to a specific medical diagnosis. For example, a doctor’s recommendation for a gym membership due to a specific condition might make it eligible, but this requires detailed documentation and prior approval.

Insurance premiums, including life insurance, long-term care, or health insurance payments, are also excluded. These are not considered direct medical expenses and are not eligible for FSA reimbursement. Verifying the eligibility of expenses beforehand is essential to avoid tax penalties.

Contribution Rules

The IRS sets annual contribution limits for FSAs. For 2023, the cap is $3,050, adjusted for inflation. Contributions are made through payroll deductions, enabling employees to allocate pre-tax income to their accounts.

Employers may contribute additional funds, but the combined total must remain within the IRS limit. Some employers offer a match or set lower contribution limits, so reviewing employer-specific plan details is critical.

Documentation Requirements

Proper documentation is key to successful FSA use. Itemized receipts or invoices must accompany all reimbursement claims, outlining the date of service, provider’s name, description of the service or product, and the amount paid.

For expenses in gray areas, such as over-the-counter medications, a Letter of Medical Necessity (LMN) from a healthcare provider may be required. This document should explain why the product or service is essential for the individual’s condition.

Keeping organized records throughout the year is important for both FSA purposes and tax compliance. In case of an IRS audit, individuals may need to verify their FSA expenditures. Digital tools, like expense-tracking apps or employer-provided portals, can simplify record-keeping by allowing users to upload receipts in real time.

Rollover and Grace Period

FSAs often operate under strict use-it-or-lose-it rules, but many plans now offer options for unspent funds. The rollover provision allows employees to carry over a portion of unused funds, up to $610 for 2023, into the next plan year. This helps preserve contributions for future use.

Alternatively, some plans provide a grace period, giving participants up to 2.5 extra months into the new plan year—typically until mid-March—to incur eligible expenses. Employers can offer either a rollover or a grace period, but not both, so participants must plan accordingly.