What makes a product or service an IRS qualified HSA/FSA expense?
Benjamin Cole
Head of Compliance
The foundation of HSA/FSA eligibility: IRC § 213(d)
Eligibility is rooted in Internal Revenue Code (IRC) Section 213 which provides the framework for U.S. taxpayers to deduct unreimbursed medical expenses that exceeded a portion of their adjusted gross income. Note the Adjusted Gross Incom limitation does not apply with respect to HSAs and FSAs.
IRC § 213(d) defines medical care expenses as amounts paid for:
The diagnosis, cure, mitigation, treatment, or prevention of disease, or
for the purpose of affecting any structure or function of the human body.
The tax code further clarifies that medical expenses includes:
Transportation primarily for and essential to medical care as previously defined
Qualified long-term care services
Insurance (including amounts paid as premiums) covering medical care
Expenses incurred for the taxpayer, spouse, or a dependent
Clarifying the list of eligible items: IRS Publication 502
Several decades later in the late 1990s, the IRS released IRS Publication 502 to serve as the practical explanation of IRC Section 213(d). The relationship between IRC Section 213(d) and IRS Publication 502 can be interpreted as “the law” and “the user manual,” as Publication 502 operationalizes the Section 213(d) framework and provides examples.
An important example of how IRS Publication 502 operationalizes the IRC Section 213(d) is the clarification that “Medical expenses exclude those which are “merely beneficial to general health.” This distinction—medical treatment versus general wellness—remains central to eligibility determinations today.
Publication 502 also provides examples of qualifying expenses; though the IRS is clear that the list is non-exhaustive, intentionally allowing room for interpretation and future expansion. Ultimately, this means there is no finite ‘official’ IRS list of HSA/FSA eligible items. Additional products and services may qualify.
Expanding eligibility: the 2020 CARES Act
The IRS operates under powers granted by Congress, meaning federal legislation and IRS guidance (such as Revenue Rulings and Notices) can materially expand or modify HSA/FSA rules.
A notable Congressional Act is the CARES Act of 2020, which provides for FSA/HSA-eligible expenses to include Over-the-counter (OTC) medications without a prescription, and menstrual care products.
These categories were not explicitly listed in Publication 502, underscoring how Congressional action can directly shape eligibility beyond the IRS’s original framework. Here’s a shortlist of other noteworthy expansions:
Medical Conferences (2000) - formally added after Revenue Ruling 2000-24 allowing for the deduction of registration fees and transportation for conferences related to the chronic illness of a taxpayer or their dependent
Weight-Loss Programs (2002) - formally added after Revenue Ruling 2002-19 allowing for the deduction of weight reduction program fees and meetings for those diagnosed with obesity or hypertension
Surgery & Enhancements (2003) - formally added after Revenue Ruling 2003-57, clarified the deduction for procedures affecting a structure and function of the body such as laser eye surgery
Categories of HSA/FSA eligibility: industry standards
Over time, the HSA/FSA industry has converged on two commonly accepted eligibility categories: Always Eligible and Dual-Purpose. While these terms do not appear verbatim in IRS guidance, they are widely used to operationalize IRS rules in practice.
It is also worth noting that although Publication 502 was written for tax deductions, it remains the primary reference point for HSA/FSA eligibility determinations.
"Always Eligible" expenses
“Always Eligible” products and services have a clear, primary medical purpose that squarely fits the IRS definition of a medical expense. These items are used directly to diagnose, treat, mitigate, or prevent disease, or to affect a bodily function.
Common examples include:
Hearing aids for hearing loss
Wheelchairs for mobility impairments
Diagnostic eye exams
Breast pumps used to support lactation
Many of these examples are explicitly listed in Publication 502, which is why HSA and FSA administrators often rely on them as benchmarks when building eligibility guidelines.
"Dual-Purpose" expenses
Dual-Purpose products and services are items that may be used for general health or personal wellness, but can also serve a legitimate medical purpose when used to treat or manage a diagnosed condition. These types of products require more scrutiny before expensing them to your HSA/FSA funds.
This is where the concept of a Letter of Medical Necessity (LMN) becomes essential. While the term itself does not appear in IRS publications, its use can be traced back to IRS clarifications around the year 2000. At that time, Publication 502 was updated to state that nutritional supplements, vitamins, herbal products, and similar items are not eligible unless:
They are recommended by a medical practitioner, and
They are intended to treat a specific medical condition diagnosed by a physician
This clarification created a pathway for conditional eligibility—not only for supplements, but for a broad range of products and services. Today, items such as fitness equipment, weight-loss programs, and certain skincare products may qualify as HSA/FSA expenses when supported by a valid LMN.
How FSA vs HSA eligible expenses are different
Eligibility rules can differ between HSAs and FSAs due to account ownership. HSAs are individually owned accounts governed primarily by IRS rules, while FSAs are employer-sponsored, so they are governed by not only IRS rules but by any coverage limitations enacted by the employer, in its discretion to define what is reimbursable under their specific plan.
While most employers align their FSA policies with IRS guidance—particularly for Always-Eligible expenses—they may apply stricter standards to Dual-Purpose items. In some cases, even a valid Letter of Medical Necessity may not guarantee reimbursement under an employer’s FSA plan.
For this reason, FSA participants should always consult their employer’s specific eligibility guidelines. At Flex, we consistently recommend this step to avoid reimbursement issues, especially for Dual-Purpose expenses.
Here at Flex, we help merchants unlock additional revenue by providing a tool that can auto-substantiate healthcare purchases at checkout that follow IRS rules and guidelines rigorously. Speak to one of our HSA/FSA payments experts to learn more about how we’re doing that.
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