As HSA/FSA reimbursement solutions become more common in e-commerce, it’s critical for brands to understand the legal frameworks governing how these tax-advantaged funds can be used. While some platforms promote fast eligibility through automated LMNs (Letters of Medical Necessity), this model carries significant legal, regulatory, and reputational risks. Below is a summary of the core areas of concern — and how Wellness Pay avoids them.
In March 2024, the Internal Revenue Service issued a public alert warning taxpayers and administrators about platforms that attempt to convert general wellness products into reimbursable medical expenses using only a doctor's note generated from self-reported health data. The IRS stated:
“Some companies mistakenly claim that notes from doctors based merely on self-reported health information can convert non-medical food, wellness and exercise expenses into medical expenses, but this documentation actually doesn’t.”¹
According to IRS Publication 502 and §213(d) of the Internal Revenue Code, a valid medical expense must be primarily for the treatment or prevention of a diagnosed disease or medical condition. The mere presence of a doctor’s note, especially one produced through a brief online form, does not satisfy this requirement.²
Example: An individual purchasing a treadmill for general fitness cannot use HSA/FSA funds for reimbursement unless it is prescribed to treat a diagnosed medical condition like obesity or cardiac rehabilitation. An LMN that lacks clinical detail or a legitimate patient-provider relationship will likely be denied — and flagged in audit.
Many platforms operate under a model where the brand funds the cost of the LMN through an intermediary service. This introduces serious liability under “all-payer” anti-kickback statutes, which prohibit payments that induce the ordering of medical items or services, regardless of whether government insurance is involved.
States such as California, Florida, and Arizona have enacted strong anti-kickback laws that mirror or extend federal protections. Penalties include criminal prosecution, fines, and imprisonment.³
Example: If a merchant pays a fee that flows to the physician issuing the LMN, this may be viewed as unlawful remuneration tied to a commercial transaction. Even if intermediaries are used to mask the payment trail, enforcement agencies routinely “look through” those structures.
Under Section 5 of the Federal Trade Commission Act, it is unlawful to omit material information that would affect a consumer’s decision-making.⁴
Promoting “simple” HSA/FSA eligibility without disclosing the real risk of claim denial may constitute a deceptive or unfair practice — particularly when reimbursement is far from guaranteed. Multiple reports now indicate that plan administrators have begun rejecting LMNs from non-compliant providers outright.⁵
Example: A brand advertises “save 30–40% with your HSA” but fails to inform the customer that the claim could be denied based on the product type, lack of diagnosis, or improper documentation. When denied, the customer is responsible for repaying their HSA or FSA and may file complaints with the FTC or state attorney general.
When HSA/FSA claims are denied, customers do not direct their frustration at the LMN provider — they hold the merchant responsible. The result is negative reviews, chargebacks, and in some cases, class-action litigation. Brand equity is placed at risk over a model the merchant does not fully control.
Example: A customer who purchased a $2,000 wellness device under the impression it was HSA-eligible is denied reimbursement. That customer may not only request a refund or initiate a chargeback, but also share the experience publicly, damaging the brand’s credibility and trustworthiness.
Wellness Pay is designed to remain fully compliant with IRS, HIPAA, FTC, and state medical laws. Our model avoids the legal pitfalls outlined above through:
Proper intake and establishment of a doctor-patient relationship
Telehealth evaluations when required by clinical guidelines or state law
Customers, not merchants, paying directly for LMN review services
Medical necessity documentation that meets IRS Publication 502 standards
Post-purchase workflow that avoids disrupting your checkout process
Approvals typically occur within 24 hours, and all documentation is audit-ready.
Internal Revenue Service, IR-2024-65: IRS Alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs, March 6, 2024. https://www.irs.gov/newsroom/irs-alert-beware-of-companies-misrepresenting-nutrition-wellness-and-general-health-expenses-as-medical-care-for-fsas-hsas-hras-and-msas
Internal Revenue Service, Publication 502: Medical and Dental Expenses (2024). https://www.irs.gov/publications/p502
Lowenstein Sandler LLP, State Health Care Anti-Kickback Analogues (2024). https://www.lowenstein.com/media/5538/state-health-care-anti-kickback-analogues.pdf
Federal Trade Commission, FTC Act Section 5: Unfair or Deceptive Acts or Practices. https://www.ftc.gov/legal-library/browse/statutes/federal-trade-commission-act
Reddit threads and administrator policies noted in: Beware of FSA Payment: Optum FSA Denied My Claim, r/EightSleep. https://www.reddit.com/r/EightSleep/comments/1djr01b/beware_of_fsa_payment_optum_fsa_denied_my_claim/
