What Happens if I Don't Reimburse My FSA for an Unqualified Medical Expense?
Yes, it is possible. Funds can accumulate earnings, which are not taxed unless funds are withdrawn for nonmedical expenses. For most types of accounts, such as Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs), if you use the card for an ineligible expense, you will be required to reimburse your account for that transaction. If you used a Health Savings Account (HSA) to pay for an ineligible expense, you may be required to pay income taxes and an additional penalty tax. Insurance fraud charges are also possible, which may carry a civil penalty. We suggest you contact your local taxpayer advocate if you require further assistance. Please see the link below:
Generally, distributions from a health FSA must be paid only to reimburse an employee for qualified medical expenses incurred during the period of coverage. An employee must be able to receive the maximum amount of reimbursement (the amount the employee has elected to contribute for the year) at any time during the coverage period, regardless of the amount the employee has actually contributed. The maximum amount the employee can receive tax free is the total amount he or she elected to contribute to the health FSA for the year.
Employers are required to follow the guidelines established in Section 125 of the Internal Revenue Code when setting up an FSA. The first step involves preparing a plan document that states the conditions for eligibility, the benefits provided, and the rules that apply to implementation of the FSA. The employer must distribute these rules to eligible employees and follow them consistently. Employers are also required to file Form 5500 with the U.S. Department of Labor each year, as well as complete a series of nondiscrimination tests outlined by the IRS. Each part of the process of implementing and administering an FSA plan for employees involves legal requirements. These requirements apply to the plan document, summary plan description, nondiscrimination testing, government filings, claims administration, and plan updates. Since compliance with these requirements tends to be complex, and since the IRS imposes serious penalties for noncompliance, most companies outsource FSA administration to a third party.
Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.
Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in IRS Publication 502, Medical and Dental Expenses. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for FSA purposes.
You cannot receive distributions from your FSA for the following expenses:
Amounts paid for health insurance premiums.
Amounts paid for long-term care coverage or expenses.
Amounts that are covered under another health plan.
If you are covered under both a health FSA and an HRA, see Notice 2002-45, Part V, which is on page 93 of IRB 2002-28 at:
For further discussion, please see: