By Bobby Stroup

On December 19, WHOOP announced their flagship product (bearing the same name as the company) is now eligible for FSA and HSA spending. This news means customers might use tax deductions to purchase the “wearable” wellness device. Effectively, courtesy of Uncle Sam, Americans can now save money on trying to be like Michael Phelps and Colleen Quigley.

More than merely a discount on a fitness band, this announcement highlights larger issues within federal policymaking. The article here explores how the complexities of the tax code are intertwined with American health care.

Tax-Advantaged Accounts

FSAs

What are FSAs and HSAs? Both are methods of avoiding taxes to cover qualified medical expenses, but there are some nuanced differences between the two types of accounts. The IRS website includes documentation specifically explaining these difference, but they area also summarized below:

Flexible Spending Arrangements (FSAs) are funds that reimburse employees through dollars set aside as voluntary salary reduction agreements with an individual’s employer. The primary reason someone might choose to utilize an FSA is that FSA contributions don’t have employment or federal income taxes deducted. 

For American households making the median income, contributions to an FSA are worth nearly 20% in savings (12% for income taxes plus another 7.65% of foregone employment taxes). Households making above the median income could save even more.

Importantly, FSAs are generally “use-it-or-lose-it” plans, meaning whatever isn’t spent by the end of the year will be returned to the employer. Some FSA plans do have grace periods or carryover policies, which partially mitigate the issue of expiring funds. Unfortunately, even with these policies, somewhere between 22 and 48% of Americans with FSAs forfeited money at the end of the year. This average loss was about $400 per person, adding up to somewhere in the range of 1.4 billion to 3 billion dollars in a single year.

Thus, the timing of WHOOP’s announcement was no accident. Americans with two weeks left before their FSA funds expired were likely looking for ways to spend those dollars. Rather than metaphorically setting their money on fire, those with remaining FSA funds were probably happy to spend them on the WHOOP device.

HSAs

Health Savings Accounts (HSAs) are similar to FSAs and have the same tax benefits. Although FSAs are set up by an employer, HSAs are available to anyone enrolled in a high-deductible health plan (HDHP). As of 2021, over 55% of Americans are enrolled in HDHPs. A decade ago, that rate was about 35%, indicating a significant growth in usage. 

On top of the tax benefits, HSAs have additional advantages. One key advantage of HSAs over FSAs is that HSAs are portable. Whereas FSAs are bound to a specific employer, HSAs are tied to a specific individual. That difference means a person keeps their HSA funds even if they change employers or leave the workforce entirely. Furthermore, HSA dollars don’t expire like FSAs.

More Individual Control?

Aiming for Autonomy

According to FSAstore.com, FSAs were introduced in the Revenue Act of 1978 as a way to correct mistakes of HRAs (Health Reimbursement Arrangements). HRAs, a predecessor to FSAs, also reimbursed qualified medical expenses, but they could only be funded by employer, not employee, contributions. On the contrary, FSAs allow both, giving employees greater say in how much tax-advantaged dollars go toward their care.

A quarter of a century after FSAs were introduced, President George W. Bush introduced HSAs by signing into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The intent was to “[e]mpower[] Americans to take charge of their health care decision-making.” Since HSAs were not tied to employment, these financial tools represented yet another step in favor of shifting control from businesses to individuals.

Today, both HSAs and FSAs can act as a method of emergency preparedness. Incentivized by the tax advantages, Americans can put money aside to have funds available when unexpected healthcare expenses occur. More than half of Americans would not be able to afford a $1,000 emergency expense if they encountered it. Money reserved specifically for that purpose may offer people a greater sense of control over their individual circumstances.

Complexity Adds Friction

Although there might be some benefits to FSAs and HSAs, not everyone thinks they are well designed. Vox journalist, Dylan Scott, described FSAs as “symptomatic of the problems that plague the country’s convoluted way of providing benefits.” Others have similarly derided the tools’ complicated nature.

WHOOP customers may encounter some of these stated problems. For one, not everyone’s FSA funds are eligible for purchasing a WHOOP (as some reddit users discovered). The Best Buy FAQs page confirms: wellness devices sometimes need a letter of medical necessity to be approved for spending. To ensure a purchase is a qualified medical expense, a doctor might need to write a letter indicating why an item should be reimbursable via healthcare spending. 

It’s hard to say that individuals can “take charge of their health care decision-making,” when they are still reliant upon someone else approving their decisions. Needing a letter isn’t necessarily a dead end, but it does add extra steps. Notably, not every patient experiences the same roadblocks, but the lack of transparency on this matter can be discouraging.

When it comes to competition, WHOOP claims “The Best Obsess.” Though the marketing campaign certainly targets athletes, the company also advertises partnerships with business leaders and other professionals. The idea is that this WHOOP mindset is applicable to any area of life.

Maybe Congress should think about “obsession” the next time they revise the tax code. A little bit of constituent concern, or customer obsession, might be what’s needed to develop tax law that promotes health in a user-friendly way.