Saving money in your Flexible Spending Account (FSA) is great, but using it for qualified purchases is even better. In order to use your FSA savings, you have to know: how to access your funds, where you can make purchases and the documentation you need to keep. It might also be helpful to know the easiest ways to do the above. We detail it all below.
What can you purchase with your FSA?
There are three different types of FSAs: Healthcare FSAs, Dependent Care FSAs and Limited Purpose FSAs. Each of these can be used to purchase different things.
Healthcare FSAs: the money you save in these accounts can be used for medical expenses like copays, coinsurance, prescriptions and medical supplies like band-aids and sunscreen.
Dependent Care FSAs: these funds are for childcare or the care of a dependent adult that lives with you full time. The care must enable you to work or to look for work.
Limited Purpose FSAs: these are for expenses related to dental or vision care.
How to access your FSA funds
So you have all this money saved up, now how do you use it? Since the nature of the goods and services for dependent care are different from medical, dental and vision care, the way you use the money in your account will likely be different.
Healthcare and Limited Purpose FSAs
To make purchases using your Healthcare and Limited Purpose FSAs you have two options:
FSA card. If your FSA administrator issued you a debit card, things will be a little easier. You can use your FSA card like a credit card to make purchases at the point of sale which could save you the step of substantiation (i.e. a verification process where you submit documentation to prove your purchase was “FSA eligible”). But not all merchants accept FSA cards. If your card is declined, either because the store doesn’t accept FSA cards or because you don’t have enough in your account to cover the balance, you will have to pay for the purchase first, then submit a claim later for reimbursement.
Reimbursement. If you don’t have the option of using an FSA debit card then you’ll have to pay for the expense first then submit documentation for reimbursement. We go over the documentation requirements below.
Dependent Care FSAs
To make purchases using your Dependent Care FSA, you have two options:
- Direct payment. If your FSA administrator will pay your care providers directly you simply tell them how much to pay and when the payment is due and they will send a check.
- Reimbursement. If your administrator doesn’t offer direct payment or if this method isn’t practical for your situation, then you will need to pay for the expense first and submit documentation for reimbursement.
What you need to know about receipts
First of all, you should always save them and make sure the information on them is readable and clear. Even if you use your FSA card at a merchant and the transaction is approved, your FSA administrator might still ask for documentation after the fact. For substantiation or reimbursement, you will need an explanation of benefits (EOB) from your healthcare provider or an itemized receipt, not just a transaction receipt. Receipts for different types of expenses require different information, and of course always follow your administrator’s specific instructions to ensure you get reimbursed.
Medical services: Who received the service, the provider or merchant name, service details, date(s) of the service, and cost.
Medical product: Provider or merchant name, product details, date of purchase, and cost.
Transportation: Must show expense details, date(s) of service, and cost.
Dependent care: Documentation must be provided from a third-party and show a description of care, date(s) of service, and cost.
And remember, claims can only be submitted for services that have already been incurred.
What is substantiation?
Substantiation is the verification process that the IRS requires to ensure you’re using your FSA appropriately. It usually entails submitting receipts for the paid item, uploading an Explanation of Benefits (EOB) that you receive from your insurance company, or a combination of the two.
An Explanation of Benefits (EOB) is a statement from your health, dental, or vision insurance plan. It describes the services received, the costs the plan will cover and the amount you’re responsible for. Your provider creates an EOB when they submit a claim for the services you received. An EOB is not a bill, but is an ideal document for substantiating FSA claims.
NOTE: Make sure your provider’s bill matches the EOB before you pay.
This might seem like a lot to keep track of, but there’s good news. Some eligible items are automatically substantiated through your FSA provider. This happens at certain merchants who have their inventory control system set up to work with IRS regulations. This means that for you the customer, the qualified purchase is automatically approved. This system is known as an Inventory Information Approval System (IIAS).
For example, if you use your FSA to cover over-the-counter medication for pain relief at a pharmacy, you may not have to substantiate your purchase.
Where you can use your FSA card
Stores that are “IIAS-certified” have modified their inventory management systems to automatically identify FSA-eligible products. Therefore, if you use your FSA card at any of these stores, you won’t have to substantiate your purchase because your FSA administrator knows it was for an eligible expense.
At these stores 90% of their merchandise is FSA-eligible. When making a purchase with your FSA debit card at 90% stores, you will need to provide substantiation. Uploading a receipt and sometimes an Explanation of Benefits (EOB) will help to verify that the purchase is FSA-eligible.
Non-certified and local merchants
When making qualified purchases at non-IIAS certified merchants, you will need to pay out-of-pocket. You can then submit your receipts for reimbursement from your FSA administrator.
Health care providers
Generally speaking, you can use your debit card at your health care provider's office to help pay for your visit. You’ll need to upload an Explanation of Benefits (EOB) and receipt so the expense can be substantiated.
If you make a purchase at a non-qualified merchant, you will have to pay for the expense out-of-pocket and submit a claim for reimbursement.
You can use the chart below to get familiar with different types of merchants and the substantiation requirements. Keep in mind that this chart covers services eligible for a Medical FSA.
If you have a Limited Purpose FSA, only dental and vision services qualify. Use Lively’s "What's Eligible" page to see what eligible expenses you can make by FSA plan type.
Not every franchise of these retailers is IIAS-certified. If not, you’ll need to pay out-of-pocket and request reimbursement. Want to look up a merchant to see their status? Use this site to search for both IIAS-certified and 90% merchants in your area.
Where you can use your Limited Purpose FSA
If you have a limited Purpose FSA, you can use your debit card at the above-mentioned merchants and providers to pay for dental and vision expenses. In addition, you can use your card at an eyeglasses retailer or to purchase contact lenses.
Spending your Dependent Care FSA
Using the FSA debit card provided with a Dependent Care FSA is a little more limited as many of the merchants and vendors for which you’ll use your contributions might not accept FSA cards. Places that might accept Dependent Care FSA cards include:
- Daycare (both adult and child)
- Au Pair service
- After-school programs
- Custodial elder care
- Day Camp (for children under the age of 13)
If the care or activity provider doesn’t accept FSA cards as a valid form of payment, you can still use your FSA money for the expense. You just have to pay for the charge first, then submit a claim for reimbursement.
Using your FSA card to make purchases at an IIAS-certified merchant is clearly the easiest path to using your funds. But even if this isn’t available to you, the process of substantiation or submitting a claim should only require one or two extra steps, as long as you’ve saved your receipts and EOBs. Which is a small price to pay for getting to use pre-tax money for out-of-pocket expenses.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.