Are Medical Equipment and Supplies Qualified Expenses?

This column is an excerpt (Question 91) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: Can I reimburse over-the-counter equipment and supplies tax-free from my Health Savings Account?

 Answer: Yes. If the equipment and supplies diagnose, cure, mitigate, treat, or prevent an injury, illness, or condition, they are qualified expenses. You can purchase these items with tax-free withdrawals from your Health Savings Account. You do not need a prescription from a state-approved prescriber to document that the expenses are qualified.

Items that you’re most likely to purchase – such as bandages, an ankle or knee brace, a splint to relieve carpal tunnel syndrome, crutches, a nebulizer, or C-PAP equipment – are qualified expenses. These items are typically used only by people who seek to treat or mitigate the effect of an injury, illness, or condition.

Sure, you may buy 100 yards of gauze to dress as a mummy for Halloween. That’s not a medically necessary item and therefore doesn’t qualify for tax-free reimbursement from your Health Savings Account. How you report that distribution is between you, the IRS, and your higher power.

Even if your Health Savings Account debit card has restricted coding (see Question 117), it’s probably set up to allow you to purchase qualified equipment and supplies. If not, you can buy a qualified item with personal funds and then reimburse yourself from your account. Although the manual reimbursement process varies by Health Savings Account provider, all offer a means of withdrawing funds to reimburse qualified expenses (or for any other purpose, subject to taxes and possible penalties if the expense isn’t qualified).

There are items that fall into a gray area – most commonly those that have primarily a personal use and sometimes represent a treatment for an injury, illness, or condition. Some taxpayers rely on a note that they were given a prescription to purchase a sauna to help them breathe better, a hot tub to treat a back injury, an in-ground pool to rehabilitate after shoulder surgery, or a Segway PT® as a substitute for a walker for mobility. In these cases, even a prescription or letter of medical necessity may be insufficient if your personal income tax return is audited.

The US Tax Court litigates a handful of such cases annually. These decisions clarify the law going forward. In addition, the Internal Revenue Service issues a small number of Private Letter Rulings each year. These rulings are binding only on the taxpayer’s individual situation, but they provide some important, albeit informal, signals about how the agency’s thinking is evolving on certain emerging topics. In these cases, officials often use the but for test (see Question 93) to determine whether you would have made the purchase but for the specific injury, illness, or condition.

Reference

IRS Notice 2010-59:

 [U]nder new § 223(d)(2)(A) and new § 220(d)(2)(A), a distribution from an HSA or an Archer MSA for a medicine or drug is a tax-free qualified medical expense only if (1) the medicine or drug requires a prescription, (2) is an over-the-counter medicine or drug and the individual obtains a prescription [Author’s note: The prescription requirement was rescinded in the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, effective for purchases made on or after Jan. 1, 2020 – see Question 90], or (3) is insulin. If amounts are distributed from an HSA or Archer MSA for any medicine or drug which does not satisfy this requirement, the amounts will be distributions for nonqualified medical expenses, which are includable in gross income and generally subject to a 20% additional tax. . .

The rules in §§ 106(f), 223(d)(2)(A), and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. Such items may qualify as medical care if they otherwise meet the definition of medical care in § 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. However, expenses for items that are merely beneficial to the general health of an individual, such as an expenditure for a vacation, are not expenses for medical care.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity. HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.