Why employees need to understand FSA eligibility rules

It’s the job of your company's FSA administrator to manage your plan in a way that ensures compliance with IRS rules and regulations. Administrators don’t take this task lightly, as non-compliance can be damaging to your broader benefits plan. To ensure compliance, administrators can set up pre- and post-purchase rules, and not understanding these rules can lead to issues when last-minute deadline shopping is involved. Let’s review a couple of common scenarios that employees might experience and the key details that will help employees avoid these situations.

FSA card or claim denied: Allison learns through her gym that she can use FSA funds to pay for her membership, as long as she has a Letter of Medical Necessity (LMN). She tries to use her FSA card at the gym directly and it is declined, as the FSA card does not recognize the gym as an approved provider of qualified FSA products or services. Allison obtains an LMN from a doctor stating that she needs to go to the gym to help treat frequent migraines. She submits a claim for the entire year of membership fees ($1,200) on December 27th. Allison’s FSA administrator reviews the claim and LMN and determines that the documentation does not provide sufficient evidence that the only reason Allison needs the gym membership is for purposes of treating her migraines, which is an IRS requirement, and declines the $1,200 claim.

Allison receives notice of the claim denial on January 12, far beyond her deadline to spend her remaining FSA funds. Not only will her gym membership not be reimbursed, but she has lost her chance to spend her remaining FSA dollars ahead of her year-end deadline.

Related: What you need to know about 4 complex FSA expenses

FSA card approved, and then subsequently declined: Doug is looking for ways to spend his remaining funds on December 31 when he notices there are “FSA-eligible” products advertised at one of the online retailers he frequently visits. He shops some of his most-needed products, including an eligible high-tech heart rate monitor for a condition he’s been watching closely. His transaction is processed and Doug continues on to enjoy his New Year’s Eve, feeling confident that he’s spent down his remaining FSA funds.

Unbeknownst to Doug, because the retailer’s process includes transaction settlement on the date the product(s) is shipped, Doug’s FSA purchase isn’t applied to his account until the order is set to ship on January 2. As a result, the purchase is declined because it’s after Doug’s plan year and he no longer has an FSA plan in the new year. Doug is notified by the retailer on January 2 that his FSA payment has been declined, and he realizes he also has forfeited those funds.

FSA card approved, but documentation denied: Mary purchases clip-in veneers with her FSA card on December 28 for $300, which is just within her remaining FSA balance. Her FSA card goes through, because the card only recognizes at the time that the transaction is dental in nature, which may be FSA eligible. Mary’s FSA administrator reviews the charge and requires that Mary submit documentation to show that the expense was for an eligible transaction. Mary submits a copy of her receipt indicating that she purchased clip-in veneers, which were advertised as FSA-eligible.

The FSA administrator determines that the clip-in veneers have no medical purpose and are purely cosmetic in nature, which makes this a non-qualified FSA expense. The administrator denies the transaction and requests that Mary re-pay the $300 to the plan. Not only does Mary need to pay back the $300 that she thought she could use her FSA for, she’s also lost her chance to spend the remaining $300 because her plan year deadline of December 31 has passed.

How can HR teams help employees avoid these situations?

FSAs are valued benefits that help employees fill financial gaps for things not covered by their company's health plan and deliver savings in the form of lower taxable income and tax savings on everyday healthcare items. However, they must be used properly to fully realize this value.

HR teams can help mitigate such complications by educating employees about eligibility and providing access to reliable shopping and account resources. When in doubt, an FSA account holder can always check about a particular retailer, product or service by contacting their FSA administrator before making a purchase.

Rachel Rouleau is chief compliance officer at Health-E Commerce, parent brand to FSA Store, HSA Store, and Caring Mill.