What you need to know about 4 complex FSA expenses

Employer-sponsored flexible spending accounts (FSAs) are a great way to save money on health care because they allow employees to set aside pre-tax dollars to pay for qualified medical expenses. That means more money in their pockets, which is something all employees want. However, interpreting eligibility can present challenges for HR teams and plan administrators, while employee participants can end up feeling frustrated with their benefits experience.

To avoid this situation and reduce claims challenges for employees, HR teams should take the time to understand the basics of how eligibility works and what makes some FSA claims so challenging.

So, what do you need to know to better support employees? Let’s start with the Internal Revenue Service’s definition of a qualified medical expense as any amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”

Not surprisingly, there are many items and services that do not fit neatly into this definition, while some expenses have additional requirements that must be met to be considered eligible. Knowing which types of expenses present the greatest challenges and how to navigate them can go a long way to ensuring that your company’s plan runs smoothly, and employees get the most out of their benefits. Here’s what you need to know about four such expenses.

Dual-purpose expenses. Some expenses can be considered both a medical necessity and for personal use. These items fall into a category known as “dual-purpose expenses.” Examples of dual-purpose expenses include most vitamins and dietary supplements (with limited exceptions), air purifiers, and fitness trackers. For example, air purifiers are generally not eligible for reimbursement; however, if an employee uses an air purifier to clean the air in their home to manage a respiratory condition, an air purifier may be considered eligible for FSA reimbursement. In this case, a letter of medical necessity (LMN) may be required to secure approval. An LMN is a document completed by a licensed health care provider recommending a particular treatment, product or device as necessary for an individual’s medical care. HR teams and employees should be aware that submitting an LMN doesn’t necessarily guarantee the eligibility of a product or service.

Special food expenses. Food is typically not eligible for reimbursement. However, there are certain circumstances in which the excess cost of a special food may be eligible with a LMN. In other words, the reimbursement is limited to the difference in cost between a normal food choice and the special food choice. The IRS has ruled that the cost of special foods and beverages qualifies as a medical expense only if the food is prescribed by a medical practitioner to prevent, cure, mitigate, or treat a specific illness; if the food is in addition to the participant’s standard diet; if the food item is not part of the participant’s normal nutritional needs; and if the individual has an LMN. It’s important for administrators to scrutinize claims for food and beverages to ensure compliance with IRS guidelines and prevent the misuse of FSA funds, which could ultimately disqualify the entire plan.

Capital expenditures. A capital expenditure refers to improvements or special equipment added to a home, such as an elevator or wheelchair ramp. As with special food expenses, these costs may be FSA eligible if the primary purpose is to facilitate medical care and if the expense would not be otherwise incurred. This is one expense category where additional factors can influence eligibility, including the following:

• A special version of an otherwise personal item can be reimbursed only to the extent of the increased cost.
• An item permanently attached to a home can only be reimbursed to the extent that its cost exceeds the home’s increase in value.
• The cost of operating or maintaining the item will also qualify as medical care, so long as the medical reason for the item still applies.
• The extent to which other family members will benefit from the improvement or expense.

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Fertility treatment. While health plan coverage for fertility treatments is expanding, an FSA can play an important role in bridging the gap between covered benefits and the expense of these treatments. However, fertility expenses can pose specific challenges for FSA administrators because under the IRS definition of medical care, there are other variables administrators must consider, such as who the expense is actually for and if the reimbursement is requested in a reasonable timeframe to when the service is received. In vitro fertilization, including the temporary storage of eggs or sperm, is typically a qualified expense, so long as the procedure is performed on the participant, their spouse or another eligible dependent. Expenses for surrogacy typically are not eligible. Meanwhile, temporary storage of eggs or sperm is undefined by the IRS, but a general rule of thumb is that storage for a period longer than 12 months will not qualify.

Helping employees manage their health isn’t always straightforward, but benefits like an FSA can go a long way to giving them the coverage and peace of mind they need. As a benefits professional, you can make a difference in the lives of employees and reduce FSA complexities by increasing your knowledge of special circumstances and expenses that might otherwise trip up your team and your employees.

Joseph Giordano is compliance manager at Health-E Commerce, parent brand to FSA Store and HSA Store. He is actively involved in the flexible compensation industry and with advocacy to ensure that FSA and HSA eligibility meets changing consumer needs.