Expenses for nutrition, wellness and general health – are they medical expenses that can be paid or reimbursed from health account plans?
Medical Expenses Detailed in IRS Publication 502
The Internal Revenue Service has issued and updated Publication 502 for many years. This is the source most employer plans and their administrators use to determine whether an expense is or is not a medical expense under an employer group medical plan, HSA, FSA, MSA or HRA. The FAQs in this release do not provide any novel interpretation from the IRS regarding the covered expenses that would depart from its analysis in Publication 502 but do provide some additional details that many will find helpful.
The IRS recently released a set of frequently asked questions addressing whether expenses related to nutrition, wellness and general health can be paid or reimbursed from various health account plans if deemed to be for medical care – including, health savings accounts (HSAs), health flexible spending accounts (FSAs), Archer medical savings accounts (MSAs) or health reimbursement arrangements (HRAs).
IRC § 213 allows a deduction for expenses paid during the taxable year for medical care if certain requirements are met. Expenses for medical care under § 213 also are eligible to be paid or reimbursed under an HSA, FSA, MSA, or HRA. Note: if any amount is paid or reimbursed under an HSA, FSA, MSA, or HRA, taxpayers cannot also deduct the amount as a medical expense on their federal income tax returns.
Medical expenses are defined as the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include the costs of medicines and drugs that are prescribed by a physician.
Medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don't include expenses that are merely beneficial to general health. The FAQs look specifically to see if the expense is payable or reimbursable from one of the health account plans.
HSA reimbursements are different than the other medical accounts mentioned. The HSA owner (i.e., the individual taxpayer) is responsible for determining any expense reimbursement and whether it meets the requirements under the Internal Revenue Code (IRC) to qualify as a tax-free medical expense reimbursement. That allows the employer to avoid making any difficult decisions. However, many HSA custodians do take it upon themselves to monitor the reimbursements or at least notify the individual if there is a question whether the expense qualifies as a medical expense.
• Dental exams
• Eye exams
• Physical exams
These are all expenses that meet the requirements for reimbursement because they are all medical expenses whether a disease is present or not.
The exams themselves all include a diagnosis and are, presumably, to prevent disease.
• programs to treat drug-related substance use disorder
• programs to treat alcohol use disorder
• smoking cessation programs
are all expenses that meet the requirements as medical expenses and are eligible for payment or reimbursement because they treat a disease.
Therapy can be a medical expense and eligible for payment or reimbursement if the expense is to treat a disease. For example, treatment for a mental illness is a reimbursable medical expense, but marital counseling is not.
The costs of nutritional counseling and weight-loss programs can be medical expenses and payable or reimbursable, but only if the program treats a disease diagnosed by a physician (such as obesity or diabetes). Otherwise, they are not reimbursable medical expenses.
Gym memberships are included in this category, but only if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). Otherwise, the cost of a gym membership is for the individual’s general health and is not a reimbursable medical expense.
Gym memberships are often confusing. When is it possible to state with any certainty that a gym membership is solely to treat the disease? How long will that status last? What if the participant does take advantage of other offers at the gym? Will that negate the characterization as a medical expense? Luckily, it is unlikely that there would be any enforcement around this issue. But an employer should maintain the documentation from the plan participant if the issue ever arises in an audit. There is no affirmative duty to do any additional due diligence beyond obtaining an assurance from the individual seeking the deduction or reimbursement, so the employer is not likely to be held to any penalties or interest if the characterization later turns out to be incorrect.
Alternatively, the cost of exercise to improve general health cannot be paid or reimbursed from the health account plans. Even if a doctor recommends the exercise, it is not reimbursable as it is for the improvement of general health and not to treat a specific illness.
Costs for food or beverages purchased for weight loss or other health reasons can be a reimbursable medical expense - if (1) the food or beverage doesn't satisfy normal nutritional needs, (2) the food or beverage alleviates or treats an illness, and (3) a physician substantiates the need for the food or beverage, the expense can be treated as a medical expense. The medical expense is limited to the amount by which the cost of the food or beverage exceeds that of a product that satisfies normal nutritional needs. If any of the three requirements is not met, the cost of food or beverages is not a reimbursable medical expense.
This is another tricky area for many plan participants and the plan administrators as there can be a lot of grey areas. For example, reduced calorie food, even if prescribed by a physician, would not meet the rule’s requirement. Additionally, a protein meal replacement program that a physician does not prescribe, would also not meet the rule’s requirements. If the meal replacement supplement is prescribed and the cost exceeds the cost of normal food, the excess cost can be treated as a reimbursable medical expense.
Nutritional supplements can also be included in this category, but only if a medical practitioner recommends the supplements as a treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a reimbursable medical expense.
Over-the-counter drugs and menstrual care products that are not prescribed by a physician are not normally deductible (except for insulin) under IRC § 213. However, OTC drugs and menstrual care products may be paid or reimbursed under HSAs, FSAs, MSAs and HRAs due to a special rule.
It can be difficult for employers and plan administrators to thoroughly vet expenses to ensure they meet the IRS standards for reimbursable medical expenses. The rules in the FAQs add some certainty around some expenses that might be in a grey zone. However, if the expense is prescribed by a physician to treat a specific illness, it will likely meet the requirements of the IRC. Employers should obtain appropriate documentation regarding the reimbursement request to further fend off potential enforcement action if the reimbursement is later questioned.
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