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(Surprise)

“You can’t use your Flexible Spending Account (FSA) to reimburse that medical expense,” says the agent over the phone and I am a little flummoxed.

When my son was born over the summer, my wife and I switched health care plans, but there was a little over-lap between the switch.

It’s a long story, but the change meant that we’d have to pay some after-tax premium payments. My solution, or so I thought, was to boost my FSA to cover the larger costs.

With just two days left in the year, my FSA provider informed me that after-tax premium payments are not a qualified expense.

Worse still, while trying to spend off the excess cash in my FSA, I wasted more than a few hours learning the hard way about another, gray area for non-reimbursable FSA medical expenses.

There are plenty of lists about expenses covered by your FSA. However, those lists have been little help for answering my family’s two medical expenses that my FSA provider won’t reimburse.

After-Tax Health Care Premiums?

I read IRS publication 969 and walked away thinking that the FSA definitely would not reimburse health care premiums. However, the technical writer for nearly all tax forms has the common tax preparer in mind.

Most people pay premiums with pre-tax dollars, which definitely wouldn’t qualify. However, my premiums are after-tax. Will FSA reimburse?

My FSA provider told me no.

Generally speaking, however, FSA reimbursement follows deductible medical expenses found in Publication 502.

In that publication, there are deductible provisions for after-tax premium payments, so long as the medical expense portion of the premium payment can be identified. Maybe FSA should reimburse for premium payments after all?

At the very least I can use it as an itemized expense so long as it exceeds 7.5% of my family’s AGI.

Just the Frames for Prescription Eyeglasses?

Expecting no reimbursement for our after-tax premium payments, I told my wife to replace her prescription eyeglass frames.

My children had done a number on her current set of frames, but the lenses were still in great shape.

We needed to burn some FSA cash, but I didn’t want to go too far into out-of-pocket territory. Replacing frames seemed like the perfect outlet.

Thanks to the premium payment fiasco the day before, I became hyper-paranoid about what would be covered under our FSA plan and decided to ask for a ruling on just replacing the frames for my wife’s prescription eyeglasses.

My FSA provider told me no, again. I asked for a supervisor and was told that lenses had to be purchased with the frames.

I am 99% certain that my FSA provider is in the wrong on this one, but I can see the problem. IRS Publication 502 is very vague about what is covered under eyeglasses:

“You can include in medical expenses amounts you pay for eyeglasses and contact lenses needed for medical reasons.”

Eyeglasses with prescription lenses would certainly fall under a medical necessity. But, can I simply purchase a lifetime supply of designer frames on FSA?

My wife wears prescription glasses and frames are a necessary part of those eyeglasses.

Given the fact my wife’s current frames are damaged, I am confident that we could have shown a necessity and this expense should have been covered.

Perhaps I should have stuck to my guns and argued out the provisions outlined in IRS publications for reimbursement for my after-tax health care premiums and frames for prescription eyeglasses.

I seem to have some strong IRS documentation to support my original assumptions that these medical care expenses should be reimbursed through FSA.

However, I have other expenses that can be reimbursed and itemized deductions looked like a viable alternative.

Have you ever found FSA gray areas? Or, problems receiving reimbursement on your FSA?

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

Photo Credit:  401K

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6 comments comments closed

  1. Just a quick comment on eyeglasses, you may have some success with the various $39 glasses sites. Frames + lenses for $39 or so. Doesn’t help with FSA, but useful to know about if you’ve never used them.

  2. Nice piece, Shaun. What a headache! Luckily, our FSA expenses have always gone smoothly. I would agree with the IRS about frames (although I understand your point about frames being a necessary part). I was always trained that whenever dealing with taxes it’s the “spirit” of the code that you should follow as a “rule of thumb.” While there are many areas of the tax code where it’s impossible to determine the “spirit”, FSAs seem pretty cut-and-dried to me: they’re designed to reimburse health-related expenses. Designer frames have nothing to do with health, so reimbursing those would have seemed to me (without reading the IRS publication) as an exploitation of the tax shelter.

    • We bought the first frames and lenses on FSA. The frames were damaged. It would seem silly that replacement frames would not health related.

  3. One of my issues, interestingly enough, was having the FSA company overreimburse me or reimburse me twice for the same expense. Quite the headache getting it resolved. Even though I included letters of medical necessity each time I submitted a receipt, about 30% of the time, I’d get the nonreimburseable code and have to call. I spent way too much time on the phone with the FSA reps.

    • You can actually claim over-reimbursed FSA as other income on your taxes and avoid working it out with your FSA.