If you've spent any time administering FSA or HSA plans, you've almost certainly come across the term "letter of medical necessity." Maybe an employee submitted one with a claim. Maybe a vendor mentioned it during a sales pitch. Maybe you've seen the phrase pop up more and more as online platforms offering instant LMNs have started flooding the market.
But here's the honest truth: for something that shows up this often in benefits conversations, there's a surprising amount of confusion about what a letter of medical necessity actually is, when it's genuinely required, and, critically, what makes one legitimate in the eyes of the IRS.
That confusion has real consequences. For employees, it can mean denied claims and unexpected out-of-pocket costs. For employers and brokers, it can mean audit exposure, compliance violations, and a whole lot of explaining to do.
So let's clear it up.
What is a letter of medical necessity?
A letter of medical necessity, commonly referred to as an LMN , is a document written by a licensed healthcare provider that confirms a specific product or service is medically necessary for a particular patient. It's not a prescription. It's not a general recommendation. It's a specific, substantiated statement that connects a patient's diagnosed condition to a specific treatment, product, or expense.
In the context of FSA and HSA plans, an LMN serves a very specific purpose: it can make certain expenses eligible for reimbursement that wouldn't otherwise qualify under standard IRS guidelines. Things like certain fitness equipment, air purifiers, special dietary foods, or ergonomic products can sometimes be reimbursed with FSA or HSA funds, but only when a qualified medical provider has documented why that specific item is medically necessary for that specific person.
The keyword in all of this is substantiation. The IRS doesn't take your word for it or your employee's word for it. Documentation is everything.
What does the IRS actually require?
This is where things get specific, and where a lot of plans run into trouble.
The IRS has clear substantiation requirements for FSA and HSA claims. For an LMN to satisfy those requirements, it generally needs to do several things:
It must come from a qualified medical provider. Not a wellness coach. Not a nutritionist without clinical credentials. Not an online platform that generates a letter in minutes based on a quick questionnaire. A licensed physician, nurse practitioner, or similarly credentialed healthcare professional who has actually evaluated the patient and can speak to their specific medical condition.
It must be specific to the individual. A generic letter stating that a product is "generally beneficial for people with X condition" doesn't meet the standard. The letter needs to connect this patient, with this diagnosis, to this specific expense, and explain why it is medically necessary for their treatment or care.
It must document the medical condition. The IRS requires that the underlying condition be identified. The letter should reference the diagnosis or medical need that makes the expense necessary, not just assert that it is.
It must be retained for substantiation purposes. Employees and employers alike need to keep LMN documentation. In the event of an audit, the IRS will want to see it, and "I thought it was fine" is not a defense that holds up well.
Why this matters more than ever right now
Here's what's changed. Over the past few years, a whole industry has emerged around online LMN providers, platforms that, for a fee, will generate a letter of medical necessity quickly and with minimal clinical oversight. Some of these platforms are legitimate and work within proper clinical and compliance frameworks. Many are not.
The problem is that from the outside, it can be very hard to tell the difference. Employees see a slick website, pay a small fee, get a document that looks official, and submit it with their claim, fully believing they've done everything right. Brokers recommend plans that accept these letters without fully understanding the compliance risk they're taking on. And when the IRS comes knocking, everyone is caught off guard.
The surge in these platforms has put LMN compliance squarely on the radar of IRS auditors. That means plans that haven't tightened up their substantiation processes are carrying more risk than they may realize.
Common mistakes that create compliance exposure
Whether you're an HR leader, a benefits broker, or a compliance advisor, these are the patterns worth watching for:
Accepting LMNs without reviewing the source. Not all letters are created equal. If your plan is to accept LMNs from online generators without any clinical oversight, you're accepting compliance risk along with the paperwork.
Treating an LMN as a permanent pass. An LMN is not indefinitely valid. Medical necessity should be re-evaluated periodically, particularly for ongoing or recurring expenses. A letter from three years ago for a condition that may have resolved is not solid substantiation for a current claim.
Confusing an LMN with a prescription. These are different documents serving different purposes. Some expenses require a prescription. Some require an LMN. Some require both. Getting this wrong leads to improper reimbursements, and improper reimbursements lead to plan disqualification risk.
Failing to train staff on what to look for. The person reviewing claims needs to know what a compliant LMN looks like. Without that training, compliance gaps are almost inevitable.
This is exactly what we're covering on April 7th, and you should be there
If any of this is making you think harder about how your plans handle LMNs, good. That's the right instinct. And we have an opportunity for you to go much deeper on this topic with the people who know it best.
On Tuesday, April 7th at 9:30 AM, Clarity Benefit Solutions is hosting a live 30-minute compliance briefing: Letters of Medical Necessity & Substantiation Pitfalls: What's Legit and What's Risky.
This session is built specifically for benefits brokers, compliance advisors, and HR leaders who are navigating the growing landscape of online LMN providers and need to understand the compliance implications before their clients face audit exposure or denied claims.
Leading the session are two people who live and breathe this stuff:
Edward Larned, Senior Vice President of Sales at Clarity Benefit Solutions, brings over 15 years of employee benefits industry experience and a deep understanding of how compliance decisions play out in the real world of broker relationships and plan administration.
Meredith Laroe, Director of Corporate Compliance & Global Operations, is a certified compliance expert with more than 15 years of experience in consumer benefits, COBRA, and employee benefits administration. She's the person you want explaining IRS substantiation requirements, because she makes complex compliance language genuinely understandable.
In 30 minutes, you'll walk away knowing exactly what qualifies as a legitimate LMN, what the IRS substantiation requirements actually look like in practice, the most common compliance mistakes plans are making right now, and concrete strategies to reduce risk for your clients.
It's free. It's live. It's 30 minutes. RSVP now!
Wrapping up
Letters of medical necessity are a legitimate and valuable part of the FSA and HSA ecosystem when they're done right. The problem isn't the LMN itself. The problem is the gap between what employees and employers think qualifies and what the IRS actually requires.
Closing that gap is what good compliance looks like. And in 2026, with IRS scrutiny on the rise and online LMN platforms becoming mainstream, it's not a gap you can afford to leave open.
If you want to make sure your plans are on the right side of this issue, for your clients, your employees, and your own peace of mind, start by joining us on April 7th. The 30 minutes you invest could save a lot of headaches down the road.
Ready to get compliant and stay that way? Visit our website to learn more | Get Clarity today!
