Is Physical Therapy Covered by FSA?

Flexible Spending Accounts (FSAs) offer a tax-advantaged way for individuals to pay for qualified out-of-pocket healthcare expenses. These benefits allow you to set aside pre-tax money from your paycheck for a wide range of medical, dental, and vision costs. Utilizing an FSA effectively leads to significant tax savings, as funds contributed are exempt from federal income, Social Security, and Medicare taxes, reducing your taxable income. The objective is to help individuals manage their healthcare budgets more efficiently using pre-tax dollars for eligible expenses.

Understanding Qualified Medical Expenses for Physical Therapy

Physical therapy qualifies as a medical expense eligible for FSA reimbursement, provided it meets specific criteria established by the Internal Revenue Service (IRS). The IRS defines qualified medical expenses as amounts paid for diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any body structure or function. For physical therapy to be eligible, it must be considered “medically necessary.”

Medical necessity means physical therapy is prescribed or recommended by a licensed healthcare provider, such as a doctor or physical therapist, to address a specific medical condition, injury, or chronic pain. This includes rehabilitation following an injury or surgery, treatment for musculoskeletal disorders, or therapy for neurological conditions. For example, physical therapy sessions for rotator cuff injury recovery or long-standing back pain would qualify.

Medically necessary physical therapy differs from services for general wellness, fitness, or cosmetic purposes, which are not eligible for FSA reimbursement. Services like general strength building, injury prevention not tied to a diagnosis, or spa-related massages are excluded. The physical therapy must be performed by a licensed professional to be considered a qualified expense.

Steps to Utilize Your FSA for Physical Therapy

Once physical therapy expenses qualify, there are two main ways to use your FSA funds: direct payment with an FSA debit card or seeking reimbursement for out-of-pocket payments. Many FSA plans issue a debit card linked to your account, allowing you to pay directly at the time of service, similar to a regular debit card. It is important to save all receipts, even when using an FSA debit card, as your FSA administrator or the IRS may request documentation for verification.

If you pay for physical therapy services out-of-pocket, you can submit a claim to your FSA administrator for reimbursement. The reimbursement process involves submitting a claim form through an online portal or by mail. This form requires your personal information, service details, provider information, amount paid, and date of service.

Documentation for both direct payment verification and reimbursement includes itemized receipts from the physical therapy provider. These receipts must clearly show the patient’s name, the provider’s name, the date of service, a detailed description of the service, and the expense amount. If health insurance is involved, an Explanation of Benefits (EOB) statement from your insurer should also be included, indicating the portion not covered by insurance. In some cases, a Letter of Medical Necessity (LMN) from your healthcare provider may be required. An LMN serves as a doctor’s note, outlining the medical condition, the recommended treatment, and how it addresses a specific medical need.

Navigating FSA Rules for Physical Therapy Expenses

Understanding FSA rules is important for maximizing their benefit for physical therapy expenses. A primary rule is the “use-it-or-lose-it” provision, which states that funds not used by the end of the plan year are forfeited. This rule highlights the importance of careful planning regarding contributions.

However, there are two common exceptions employers may offer to mitigate the impact of the “use-it-or-lose-it” rule. One is a grace period, allowing up to 2.5 months after the plan year ends to use previous year’s FSA funds, extending the deadline to March 15 of the following year for calendar-year plans. The other exception is a carryover provision, which permits a limited amount of unused funds to be rolled over into the next plan year. For 2025, the maximum carryover amount is $660. Employers can choose to offer either a grace period or a carryover, but not both.

Careful record-keeping is important for all FSA expenses, including physical therapy costs. This involves retaining all itemized receipts, EOBs, and any Letters of Medical Necessity. These records are important for substantiating claims and for potential audits by the FSA administrator or the IRS. If you change employers or terminate employment, any unspent funds in your FSA are forfeited back to the employer. However, some plans may allow for continued use of funds for expenses incurred prior to termination, or offer the option to continue the FSA through COBRA coverage, though this requires after-tax contributions.