Guide to Offering Health Spending Benefits for Mental Health

An overview to designing FSAs, HRAs, HSAs, LSAs, rewards, & more for mental health

This year, roughly one in five American adults will experience a mental health condition. Many, however, will be unable to access needed care due to its high cost. Fortunately, mental health benefits offered by organizations like third-party administrators (TPAs) and specialty benefit providers seek to solve this gap in care.

A health spending benefit like a health reimbursement arrangement or a rewards program is a worthy addition to any mental health solution by providing members access to funds for behavioral health providers in and outside traditional provider networks. This guide will break down health spending benefits from the lens of designing a benefit for mental health treatment.

A brief overview of health spending benefits 

While there are many different health spending benefits, they can all be sorted into two categories: accounts that provide tax savings and accounts that do not offer tax savings. As you might guess, pre-tax accounts (or tax-advantaged accounts) are attractive to both participants and employer clients for their potential tax savings. Pre-tax accounts also have stricter regulations as the Internal Revenue Service (IRS) doesn’t just give away funds. Non-tax-advantaged accounts, on the other hand, offer greater flexibility with fewer regulations— but without any savings on taxes.

Pre-tax accounts 

There are three main types of pre-tax accounts designed for qualified medical expenses (QMEs): flexible spending accounts (FSAs),* health reimbursement arrangements (HRAs), and health savings accounts (HSAs). Contributions to these benefits are considered tax-free (or pre-tax) as long as the account funds are used for qualified medical expenses. 

*FSAs are technically arrangements, but are commonly referred to as accounts.

A chart highlighting the different types of pre-tax accounts: flexible spending arrangements, health reimbursement arrangements, and health savings accounts.
FSAs, HRAs, and HSAs are the most common pre-tax accounts.

“Specialty HRA”

Unlike FSAs and HSAs, organizations can design general purpose HRAs to target specific member needs. This ability has earned it the nickname "specialty HRA," and made HRAs the favorite choice of organizations looking to design a benefit program that address for member out-of-pocket costs for mental health.

Accounts without tax advantages

With fewer IRS guidelines, non-tax-advantaged accounts offer greater design flexibility to benefit plan designers. For our purposes, we’ll organize these accounts into two categories of programs: directed-spend programs and rewards programs.

a chart highlighting directed spend and rewards programs.
Directed spend programs and rewards programs are examples of non-tax-advantaged accounts.

Directed spend nicknames 

"Directed spend" programs have different names in different industries. Employer benefits call them "lifestyle spending accounts" (LSAs), and Medicare Advantage plans call them "supplemental benefits." While sectors have given them different names, they all refer to a program where members are offered a spending account with spending controls.

Benefit stacking

It’s possible to offer more than one account to members. With a well-designed interface and benefits defined by software (not cards), a provider can stack benefits that offer tax savings and comprehensive care outside of regulations for expenses not considered medically qualified by the IRS (e.g., family counseling).

Qualified medical expenses for mental health

If you'd like to offer a pre-tax account, step one is familiarizing yourself with how the IRS defines “medical care” in U.S. Code § 213 - Medical, dental, etc., expenses

(1)The term “medical care” means amounts paid—(A)for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,(B)for transportation primarily for and essential to medical care referred to in subparagraph (A), - U.S. Code § 213

“Diagnosis, cure, mitigation, treatment, or prevention of disease”

The IRS uses the U.S. Code Section 213(d) definition for medical care to determine which expenses are qualified medical expenses (QMEs) for pre-tax accounts. It’s important to note the emphasis given on “diagnosis, cure, mitigation, treatment, or prevention of disease.” Because of this definition, services like marital counseling are not considered a qualified medical expense. 

In the table below, we used primary sources to identify common expenses for mental health and whether they are considered a qualified medical expense. A helpful resource is, which is sponsored by the U.S. Office of Personnel Management and administered by HealthEquity, Inc for federal employees.

Note: LMN = Letter of Medical Necessity

a chart of common mental health spending benefits and whether they are qualified medical expenses
A list of common mental health services and whether they are known qualified medical expenses.

Topics to consider

Here are some questions we commonly address when partnering with organizations looking to design a health spending benefit to address out-of-pocket mental health expenses.

Therapy and counseling services

Is therapy considered a qualified medical expense? Because they don't address diagnosed medical conditions, the IRS generally does not consider relationship counseling and life coaching qualified medical expenses.* However, therapy or behavioral counseling may be considered a qualified medical expense if they're used to alleviate or prevent a physical or mental disability or illness. For example, weight loss counseling may be considered a qualified medical expense when given as an evidence-based treatment for a diagnosed condition of obesity.

For this reason, it’s considered a best practice for organizations to require a letter of medical necessity (LMN) from mental health providers for counseling services. LMNs should include the following:

  • The diagnosed medical condition.
  • The proposed treatment plan.
  • An explanation of why the proposed treatment is medically necessary for the patient's condition.

*non-qualified expenses can still be supported with a directed spend or rewards program

Claims administration for health reimbursement arrangements

Who’s administers the claims? HRAs are employer arrangements where the member (employee) is reimbursed for qualified expenses. Administering claims can be done on two tiers:

  • Tier One: The mental health benefit provider takes the lead on administration, working with members and health plans on all front-line support including: claim submissions, ensuring all claims are fully substantiated, and any questions about the benefit program. Because the platform solution is not administering the claim, the platform does not have to be introduced to members, and a fully rebranded solution is possible. This option is advantageous for mental health providers who want to gain brand equity and own the member experience.‍
  • Tier Two: Mental health benefit provider defers to a platform solution, having the platform administer front-line support to end-users including adjudicating all claims. In this scenario, the platform solution supports the administration of the benefit, so their name should be introduced to members. Tier two is a good solution for teams without the bandwidth or subject matter expertise to administer the benefits or adjudicate claims for members.

If I want to___, then ___.

Here’s a potentially helpful way of looking at mental health expenses and health spending benefits.

A chart highlighting which health spending benefits best support mental health services
HRAs are the best health spending benefit for programs with qualified medical expenses.

We're here to help

Providing a health spending benefit to your members is a very exciting solution but can also be daunting. But with the help of some experts and tech-friendly solutions, it can be accomplished with minimal stress.  And we'd love to help! We build software tools and APIs that enable organizations to design, launch, and manage all pre-tax accounts, directed spend accounts, rewards, and supplementals.. We power the “health wallet” for all healthcare spending, acting as a single touch point for any consumer healthcare transaction. In our work, we leverage modern engineering advances and human-centered design principles to offer the most advanced solution on one card, app, and API.

For those interested, we created a similar guide to designing and offering a health spending benefit for fertility expenses.

Josh Hostetler

Josh leads content for First Dollar, a fintech company that builds infrastructure for health spending benefits. Before First Dollar, Josh led course creation at Aceable, taught First Grade, waited tables at Olive Garden, and wore many other hats. He misses the breadsticks.