Flexible Spending Accounts: How They Work And Who Benefits
Our children started the new year on winter break with time indoors during an especially dreary, gray season. They’ve cooked at home, made trips to the gym, and slept—a lot. There’s been so much sleep and so little sunshine that we bought them Vitamin D and iron supplements.
We paid out of pocket for these items. Their doctor has not diagnosed them with any vitamin deficiency, so we can’t use our flexible spending account (FSA) dollars. That’s the money my husband contributes, pre-tax, from his salary into an account (that his employer sets aside with an FSA provider) for use on eligible medical expenses.
FSAs have been around since 1978. Policymakers wanted to ease the financial burden of rising healthcare costs on families, and FSAs (which reduce taxable income and overall tax liability) can encourage employees to plan and budget for annual medical expenses. Those expenses don’t include the vitamins, healthy food, or gym memberships that we choose to purchase.
Should they? Should tax policy encourage and reward my family’s healthier choices by expanding the use of FSAs? Some companies—intermediaries between consumers, FSA providers, and health and wellness industries—think the answer is yes.
One company, featured last month in The Washington Post, invites individuals to complete a two-minute online survey to see if FSA funds can cover certain products and services the company promotes.
I completed it, curious whether I could use FSA funds for both a gym membership and meal delivery plan. The annual limit for our FSA contribution is $3,200. In 2023, we contributed only $1,500 (we do not have a lot of recurring medical expenses). Basic membership at the gym in 2024 would cost about $700 a year, and I could develop an annual meal delivery service plan that costs about $1,000.
I answered a few questions about myself and my family history. I focused on preventive options for my occasional migraine headache and arthritis in my neck, as well as the history of heart disease in my family.
The company approved the gym and meal plan for FSA reimbursement. All I had to do was pay the company $30 for a letter, signed by a nurse practitioner, explaining the medical necessity for the services I selected. The documents arrived by email within two hours (here and here). If our FSA provider were to deny reimbursement, the company says it would make up the difference.
Alas, we decided to contribute $1,500 to our FSA in 2024 during open enrollment a couple months ago. Had I filled out this survey then, I could have maxed out our FSA contribution and bought a new gym membership and meal plan, while reducing our taxable 2024 income by $1,700.
Is this good policy?
Personally, this could have been great. I had medical documentation confirming that I needed (1) heart rate zone interval training to reduce migraines, and (2) a plant-based, nutrient-rich meal plan to manage arthritis in my neck. The company did all the legwork for me, not only providing the medical documentation but also navigating IRS rules about eligible expenses.
But as a friend of sound tax policy, I’m skeptical.
To start, I could have talked to my own doctor about both of these health concerns during my annual physical, or even over email or a Telehealth visit. And to get our tax benefit, I would still have to spend an additional $1,700. That reminds me of the excitement of buying something new on sale at a 30 percent discount, thinking I “saved” some money by making a purchase.
Granted, FSAs are a helpful tax benefit to many people who incur medical expenses, including my family (who now have beautiful smiles thanks to our FSA funds). About 16 percent of nonfederal public and private employers offered FSAs to their employees in 2018. According to the 2020 Bureau of Labor Statistics National Compensation Survey, about 43 percent of privately employed individuals had access to an FSA in March 2020. Larger employers, like my husband’s, are more likely to offer FSAs than smaller employers.
But it’s employees with higher wages who are more likely to have access to FSAs than those with lower wages. And, because they face higher marginal tax rates, they derive more benefit from the exclusion of FSA contributions from taxable income. Also, people with higher wages are more likely to have available income to contribute to an FSA and to spend more on their health in the first place.
While it’s noble for the company to encourage health-conscious choices among FSA holders, it’s also a savvy business strategy. You direct generally higher-wage earners to specific companies that offer specific products and services while guaranteeing those earners a tax benefit—all for the low, low price of $30.
The company’s founders acknowledge that, ideally, their services wouldn’t be necessary. “To be honest, we think our company shouldn’t exist… A goal… is to show that subsidized food and exercise improve health outcomes.” They hope policymakers one day allow everyone with a tax-advantaged health care spending account to “purchase healthy food and exercise pre-tax without a Letter of Medical Necessity.”
But why stop at holders of FSAs? What about a refundable tax credit available to every household for all healthcare-related expenses that phases out as income increases, whether for health promotion or medical intervention? If it could be offset and not add to the deficit, it might do a better job of reaching everyone—or at least those who could most use the assistance of federal tax incentives.
And nobody would be out $30.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
