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Eligible Health Expenses: Avoiding Hefty Penalties

As today's world of health care becomes more complex, consumers are looking for ways to combat rising costs. One of the best ways people can deal with the high costs is a Flexible Spending Account, also known as an FSA. Opened through an employer, it's funded through payroll deductions and allows money to be accumulated to pay for such expenses as prescription drugs, vision and dental care and doctor visits.

It's important to remember whatever money is accumulated in an FSA must be used by the end of that year or it's forfeited according to FSA rules. Therefore, employers will urge employees to use their money as the year comes to a close and pharmacies will post signs reminding people of products that are FSA eligible.

Many people use FSA funds to pay for prescription drugs not covered by their health insurance. Other items such as bandages, first-aid supplies, and more are also paid for with an FSA. Dental services like root canals or orthodontia, like braces, are also FSA eligible expenses. All money used is pre-tax, and it can build up over the course of the year until enough money is accumulated to pay for whatever's needed.

One of a FSA’s benefits is tax free money to use for vision care. Vision care expenses are some of the most popular ones paid for by an FSA. Eyeglasses as well as prescription sunglasses are covered, as are contact lenses, contact lens supplies, and the cost of either the whole eye exam or the copay from the exam.

Health Savings Accounts, similar to an FSA, also pay for many products and procedures. However, HSA eligible expenses include non-traditional medical care such as acupuncture, chiropractic and homeopathic treatments. In addition, it also pays for wheelchairs or prosthetic limbs, mental health treatment, prenatal classes, addiction treatment programs and more. An added benefit is that HSA contribution limits are higher than the contribution limits for FSAs.

Unfortunately, HSA accounts are only available to people with a high deductible health plan. HSA plans are available to you outside of your employer, though! You can find banks that offer no-fee HSA accounts and even specifically shop for insurance that is HSA-compatible.

While most expenses are covered by an FSA or HSA, some are not. Many over-the-counter drugs are not covered by either (unless you have a prescription) and nothing covered by insurance can be claimed on an FSA. Long-term care expenses are also not eligible, and the IRS does not allow any funds from a Flexible Spending Account for use in paying health insurance premiums. While most over-the-counter medications are not covered, the IRS does make an exception for insulin.

Generally, if an item that's not eligible is filed, the IRS will simply deny the claim and no major penalties are assessed. However, if there is thought to be an attempt at fraud, the IRS will investigate and potentially file criminal charges if necessary. To make sure everything goes smoothly, it's best to know what is or is not eligible and ask the Human Resources director at your place of employment if there are any questions.

As health care expenses continue to increase, the role of Flexible Spending Accounts and Health Savings Accounts will continue to become more important. Easy to open and use, these accounts are proving to be a great way for many people to defray the cost of health care while making sure they and their family will have access to whatever health care items and procedures they need.

Last Updated: March 01, 2015