By alphacardprocess July 24, 2025
The days are long gone when insurance paid the bulk and patients left a simple copay. As more patients are enrolled in high-deductible health plans, they are relying more heavily on FSA (Flexible Spending Accounts) and HSA (Health Savings Accounts) to put controls around out-of-pocket costs. That helps them, but it can pose a real head-scratcher for health practices.
And if your front desk staff or billing team or payment processor doesn’t understand the differences between FSA and HSA payments— or know how they work — that can result in denied transactions, unhappy patients, or even compliance problems.
This blog clears up the confusion and distinguishes FSAs and HSAs, what rules the IRS enforces, how to accept payment correctly and snares medical offices often unwittingly get snared – and more. Whether you’re a small clinic looking to grow or a larger practice, these tools can help smooth your payment process — and your patient relationships.
What Are FSAs and HSAs?
Before your staff can confidently embrace FSA and HSA payments, they need to understand what each of these types of accounts is — and how they’re not the same thing.
Flexible Spending Account (FSA)
A FSA is a pre-tax savings account that is established and owned by an employer. Patients can spend the money on certain eligible medical costs, such as co-pays, prescriptions and some over-the-counter items. But FSAs have harsh restrictions:
- “Use-it-or-lose-it”: Most FSA dollars are forfeited at the end of the plan year, or a run-out period (usually 2.5 months).
- Not portable: When an employee leaves their job, he or she typically loses access to any unused funds.
- Restricted flexibility: Only certain items on the IRS approved list are eligible, and incorrect usage can result in rejected charges.
- FSA cards: The majority of patients have a special debit card associated with their account that they can swipe just like any other payment card — but only at eligible providers.
Health Savings Account (HSA)
An HSA, on the other hand, can only be used by high-deductible health plan enrollees. It, too, is funded with pre-tax dollars, but offers greater flexibility and longer-term advantages:
- Funds roll over: Unlike FSAs, HSA balances can be rolled over from one year to the next.
- Portable: The account is tied to the person, not to their employer — even if they switch jobs or retire.
- More uses: Funds from an HSA can be used to pay for many medical, dental, vision and prescription expenses.
- Investment potential: People are allowed to invest their unused HSA money and investments in the account grow tax free, and can be used later — even into retirement.
Understanding these differences is crucial when it comes to accepting FSA and HSA payments. A swipe that works for one patient may not go through for another — and knowing why can help your staff avoid confusion, rejected transactions, or billing issues.
What Services Are Eligible for FSA/HSA Payments?
All medical expenses aren’t treated equal — especially when it comes to FSA and HSA payments. While such accounts provide great flexibility for patients, there are IRS rules about exactly what can and can’t be covered when using them.
The official guide is IRS Publication 502, which details all qualified medical expenses. Your billing staff don’t have to commit this whole list to memory, of course, but getting a hand on the basics can save you the headache of bad cards or angry patients.
Generally, patients can use their FSA or HSA card for:
- Doctor’s office visits
- Copays and deductibles
- Prescription medications
- Diagnostic tests and lab work
- Mental health counselling
- Physical therapy
- Dental cleanings and fillings
- Eye examination, glasses and contact lenses
Such items are all eligible as qualified medical expenses under I.R.S. rules — if they are medically necessary and not cosmetic.
What’s Not Typically Covered?
A few services that often dupe patients but are rarely eligible for FSA or HSA funds:
- Cosmetic surgery (e.g., Botox, liposuction)
- Teeth whitening
- Gym membership (unless medically prescribed for a particular condition)
- Nonprescription drugs, except when prescribed by the prescriber
Pro Tip for Practices
Before processing FSA and HSA payments, always verify the service is an eligible one. Such a simple process can save declined transactions, billing disputes or chargebacks and enhance patient satisfaction. Besides that, you must also accept other payment methods like debit and credit card processing, digital wallets, and more.
If you’re not sure, you should verify whether the patient has another way to pay—and encourage the patient to verify with the account provider.
Can Your Practice Accept FSA and HSA Cards?
The short answer is it depends but only if your payment processor is correctly configured to process FSA and HSA payments. There are two things your practice absolutely need to have to be able to take those cards without a hitch:
1. Correct Merchant Category Code (MCC)
Your business must be categorized under the proper Merchant Category Code — generally, MCC 8011 for medical services. This lets the card issuer know that you’re a healthcare professional who is eligible for the card. For those misclassified (say, as a general merchandise retailer), FSA and HSA transactions are probably declined, even for eligible services.
2. Support for IIAS or MCC Restrictions Checks
Numerous FSA and HSA cards are processed through systems like the Inventory Information Approval System (IIAS) or MMCC category restrictions to validate qualified purchases. Your payment processor must work with these systems in order to validate transactions.
Check with your provider to see if these things are enabled or your setup can process the FSA and HSA payments. By making sure things are set up properly, you save yourself — and your patients — from the disappointment of an unnecessary denials.
Compliance Rules You Must Follow
When it comes to accepting FSA and HSA payments, compliance isn’t just good practice — it’s an IRS requirement.
IRS Regulations
FSA and HSA funds can only be used for qualified medical expenses. Card providers or managers may require receipts to verify purchases. Without the right paperwork, your patients could take a financial hit — eroding trust with your practice.
Compliance Insights: Best Practices for Staying in the Clear:
- Itemize and clearly describe services with CPT or service codes on all receipts.
- Train front desk and billing staff to differentiate between eligible services (such as a physical exam) and ineligible ones (such as teeth whitening).
- Document services clearly and keep copies securely in case of audit or disputes.
HIPAA Considerations
Receipts/requisitions should not contain more protected health information (PHI) than it is required. If you’re also storing payment logs outside of your application (on a third-party cloud tool), ensure they adhere to HIPAA rules.
Keeping your FSA and HSA payments in line and ensuring proper documentation isn’t just a smart way to protect your patients — it’s an intelligent way to safeguard your practice.
How to Train Staff to Handle FSA and HSA Payments?
Confusion at the front desk can make a frustrating visit. Teaching your staff a few tricks can make paying with FSA or HSA funds a smooth, easy process.
What to Cover:
- How FSAs and HSAs differ — in portability, expiration rules and what each can cover
- Recognising eligible services — what’s allowed under IRS guidelines vs. what’s not
- How to respond vs. how to politely decline, as in “Your FSA may not cover this, would you like to try another card?”
- Times to ask for alternative payment — and how to do it with no shame and no drama
Conclusion
FSA and HSA payments are increasingly a part of patient payment. While they offer a way for patients to save on out-of-pocket costs, they also introduce their own set of regulations and liabilities for doctors’ offices. The key to success?
Attention, instruction and the right tools. Ensure that your staff knows how to handle these cards, that your payment systems are set up correctly, and your receipts and documentation meet IRS and HIPAA standards. A few small steps now can avoid denied charges, patient anger and noncompliance in the future.
It’s not just getting paid — it’s building trust. When you facilitate a streamlined and secure process, patients are more likely to come back to you and more likely to refer others.
Frequently Asked Questions
Q1. Can patients use both FSA and HSA payments at your practice?
Yes, but not at the same time. Patients with both accounts usually decide which to use based on their balance or the type of care received.
Q2. What if an FSA or HSA card declines?
Politely ask for another payment method. Declines often happen due to ineligible expenses or merchant category mismatches.
Q3. Do I need to give patients a receipt for every FSA/HSA payment?
Yes. Itemised receipts help patients validate their expenses if questioned by the IRS or card administrator.
Q4. Are over-the-counter items eligible?
Only if prescribed. Painkillers, allergy meds, and other OTC products typically require a doctor’s note for FSA/HSA coverage.
Q5. How can I tell if my POS system accepts FSA and HSA cards?
Check with your payment processor. Your MCC (Merchant Category Code) must be classified for medical services, and your system should support IIAS or related compliance tech.