How Does an FSA Card Work for Eligible Expenses?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows individuals to set aside pre-tax money for eligible healthcare expenses. This reduces taxable income. The FSA card, often a debit card, provides a convenient way to access these funds for qualified medical costs.

Understanding Your FSA Card

An FSA card functions as a debit card linked directly to your Flexible Spending Account, enabling direct payment for eligible healthcare expenses. These pre-tax funds are typically made available at the beginning of your plan year, rather than as contributions accrue. The card helps to minimize out-of-pocket payments and the need for submitting reimbursement claims.

FSA funds generally operate under a “use-it-or-lose-it” rule, meaning any unused money at the end of the plan year may be forfeited. However, some employers may offer a grace period of up to two and a half extra months to use the funds, or allow a carryover of a limited amount, such as up to $660, to the following year. The specific option depends on the employer’s plan design.

Identifying Eligible Purchases

The Internal Revenue Service (IRS) defines which medical expenses are eligible for FSA reimbursement, ensuring funds are used for diagnosis, cure, mitigation, treatment, or prevention of disease. These typically include a broad range of healthcare services and products. Common eligible expenses often encompass prescription medications, copayments, and deductibles for medical, dental, and vision care.

Beyond traditional medical services, many over-the-counter (OTC) items also qualify, such as bandages, first-aid supplies, and feminine hygiene products. Since January 1, 2020, most OTC medicines and drugs no longer require a prescription to be eligible for FSA reimbursement. Expenses for general health items not tied to a specific medical condition, or cosmetic procedures, are typically not eligible.

Many retailers, especially those selling both healthcare and general merchandise, utilize an Inventory Information Approval System (IIAS) to identify eligible items at the point of sale. This system verifies an item’s eligibility by its UPC code, automatically deducting the correct amount from your FSA balance. Alternatively, some pharmacies or drugstores may operate under the “90% Rule,” which allows them to accept FSA cards if at least 90% of their gross sales consist of eligible medical items, although these transactions may still require substantiation later.

Making Purchases with Your Card

Using your FSA card for eligible expenses is similar to using a standard debit or credit card. For in-person transactions, you typically swipe or insert the card at the point of sale. You might be prompted to select “credit” or “debit” and enter a Personal Identification Number (PIN) if required by the merchant’s system.

When making online purchases, you enter the card details, including the card number, expiration date, and CVV, on the eligible merchant’s website. At a doctor’s office or pharmacy, you present the FSA card for direct payment of copayments or prescription costs. Many transactions are automatically approved at merchants equipped with an IIAS.

If an FSA card transaction is declined, several factors could be at play. Reasons might include insufficient funds, an inactive card, attempting to purchase ineligible items, or the merchant’s system not recognizing the transaction as eligible. In such cases, the transaction often cannot be completed with the FSA card, and an alternative payment method would be necessary.

After Your Purchase: Documentation and Claims

Maintaining meticulous records for all FSA card transactions is important, even those that seem to be automatically approved. The IRS requires that all FSA expenses be properly substantiated, meaning documented and approved, due to the tax advantages associated with these accounts. You should retain itemized receipts for this purpose, as your plan administrator may request them for verification.

If a transaction needs further verification, you may receive a substantiation request from your plan administrator, typically via email or mail. Such requests usually require a receipt containing specific information: the date of service, a clear description of the service or item, the dollar amount, and the provider or store name. Failure to provide proper documentation for an unsubstantiated transaction within a specified timeframe, often around 85 days, can lead to the amount being repaid to your FSA or offset against future contributions.

For instances where the FSA card cannot be used, such as with a provider who does not accept it or for out-of-pocket payments, you can submit a manual claim for reimbursement. This process involves completing a claim form and attaching the required documentation. If an FSA plan consistently fails to comply with substantiation requirements, it could lose its tax-favored status.