The IRS recently issued an alert reminding taxpayers that tax-advantaged health spending accounts, such as health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), cannot pay for, or reimburse, personal expenses for general health and wellness. Similarly, health savings accounts (HSAs) cannot be used to pay for these personal expenses on a tax-free basis.
Read on for more information.
Medical Expenses Deduction Background
Medical expenses are the costs of “diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”[1] These expenses include payments for medical services rendered by physicians, surgeons, dentists, and other medical practitioners as well as the costs of equipment, supplies, and diagnostic devices needed for these services. Additionally, these expenses include the costs of drugs and medicines prescribed by a physician. Importantly, medical expenses must pertain to the alleviation or prevention of a physical or mental disability or illness. They do not include expenses that are merely beneficial to general health or for general wellness or nutritional value.
Generally, a deduction is allowed for expenses paid during the taxable year for medical care if certain requirements are met. Alternatively, medical expenses are eligible to be paid for or reimbursed under an FSA, HRA, or HSA.
IRS Alert
The IRS released this alert to warn taxpayers of companies’ misrepresentation of circumstances under which food and wellness expenses can be paid or reimbursed under FSAs, HRAs, and HSAs. Some companies are mistakenly telling individuals that doctor notes based merely on self-reported health information can convert non-medical food, wellness, and exercise expenses into qualified medical expenses.
Taxpayers are advised “to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don’t qualify as medical expenses.” said IRS Commissioner Danny Werfel, according to the alert.
Example: The alert provides an example of these aggressive and misleading marketing tactics in which a diabetic, seeking to control his blood sugar, sees an advertisement from a company claiming he can use pre-tax dollars from his FSA to purchase healthy food by contacting the company. He contacts the company, who tells him that for a fee, the company will provide him with a “doctor’s note” that he can submit to his FSA to be reimbursed for the cost of food purchased in his attempt to eat healthier.
However, when he submits the expense with the 'doctor's note', the claim is appropriately denied because food is not a medical expense.
The alert references IRS FAQs from 2023 that we previously reported on here, clarifying that costs related to nutrition, wellness, and general health are qualified medical expenses only under certain circumstances.
To underscore the example above, these FAQs clarify that food or beverages purchased for weight loss or other health reasons can only be reimbursed under an FSA, HRA, or HSA if:
- the food or beverage does not satisfy normal nutritional needs,
- the food or beverage alleviates or treats an illness, and
- the need for the food or beverage is substantiated by a physician.
Furthermore, the medical expense is limited to the amount by which the food or beverage’s cost exceeds the cost of a product that satisfies normal nutritional needs.
Finally, the alert warns that FSAs, HRAs, or HSAs that pay for, or reimburse, non-medical expenses are not qualified plans. As a result, all payments made to taxpayers under these plans, even reimbursements for actual medical expenses, are includible in income.
Employer Considerations
Employers are advised to be aware of this IRS alert with respect to reimbursable expenses under an FSA, HRA, or HSA. These alerts may signal potential IRS scrutiny and audit activity in these areas.
Employers are encouraged to ensure that the vendors administering their FSAs, HRAs, and/or HSAs are processing and adjudicating claims properly in accordance with this recent IRS alert to avoid jeopardizing the tax qualification of these plans.
Risk Strategies is here to help. Contact us directly at benefits@risk-strategies.com.
[1]Section 213(d)(1)(A) of the Internal Revenue Code.
