Your Doctor Prescribes It. But Is It Qualified for Tax-Free Reimbursement?

There are some dual-purpose services and goods that you can reimburse tax-free from a health account. But a doctor's prescription may not satisfy the IRS.

You've probably had this experience before: You purchase a good or service and apply for reimbursement through your Health FSA or your Health Savings Account. You're sure it's a qualified expense. So does your doctor. But the tax man may disagree. And guess who usually wins these arguments?

Let's explore this issue and analyze some examples.

Qualified Expenses

A qualified expense (often referred to as an eligible expense as well) is any good or service that diagnoses, treats, cures, mitigates, or prevents an injury, illness, or condition. You may hear these expenses referred to as Section 213(d) expenses, a reference to the applicable part of the federal tax code. The tax code doesn't list specific services (although IRS Publication 503, revised annually, does list and define many), but adherence to the list above minimizes the likelihood that you'll get into trouble.

Dual-Purpose Items and the But-for Test

Some items have dual purposes, typically both to prevent the onset of a condition and treat symptoms of a condition. As an example, think of calcium supplements. A doctor may routinely advise patients, particularly women, over a certain age to consume calcium supplements to strengthen their bones to fight possible osteoporosis. In that case, the patient is engaged in preventive behavior. On the other hand, a doctor may diagnose a loss of bone density and recommend the same over-the-counter drug regimen to rebuild bone density after the diagnosis. This use of calcium supplements is now a treatment rather than a preventive course of action.

Another concept in our analysis is the but-for test. Simply stated, when assessing whether a good or service is qualified for tax-free reimbursement, we must ask whether the patient would purchase that item but for an applicable diagnosis. We'll illustrate in more detail below.

Gym Membership

A common misconception is that a gym membership is a qualified expense. This belief is often reinforced by medical insurers' reimbursing a portion of members' fitness-club fees. Since a common industry rule-of-thumb is that a patient's remaining financial responsibility for a service covered by a medical plan is always qualified for tax-free reimbursement from a Health FSA or Health Savings Account, the remainder of the annual gym fee can be reimbursed tax-free from either account.

But gym reimbursements, like discounts on glasses, contact lenses, hearing aids, and child-safety items, aren't medical benefits. Rather, they're member value-add programs or straight discounts that insurers negotiate for their members. Thus, the fact that an insurer offers a reimbursement doesn't make the expense qualified.

Most Americans who join a fitness club do so to maintain or improve their health, train for a competition, or increase their strength. These goals are noble and often result in a healthier and more fulfilling life. But absent a medical diagnosis, a gym membership isn't qualified for tax-free reimbursement.

On the other hand, some doctors prescribe a gym membership after a specific diagnosis, say morbid obesity, osteoporosis, or rehabilitation from surgery. In these cases, the membership fee may be a qualified expense. Here are several important variables:

• Is the treatment plan appropriate for the diagnosis? It doesn't have to be the lowest-cost or the most traditional treatment plan. But it must be recognized as a treatment option.
• Is there a plan? Sending a patient to the gym to "get healthy" isn't enough. There needs to be a plan that the patient follows and the doctor monitors.
• Would the patient be a member of the gym but for this treatment plan? A patient who's already a gym member doesn't meet this threshold. Nor does a patient who merely switches fitness clubs. But someone who isn't a gym member who accepts this treatment and enrolls generally satisfies the but-for test

Personal Trainer

In a similar vein, a personal trainer generally isn't a qualified expense. Most people hire personal trainers to enhance their general fitness, improve their athletic performance, or avoid injuries while achieving the first two goals. Those objectives all relate to general health and therefore the trainer fee isn't qualified for tax-free reimbursement.

On the other hand, after my spinal-fusion surgery, my surgeon told me that I needed to strengthen my core as part of my rehabilitation. He recommended either physical therapy or a personal trainer. Pre-surgery, I had paid $80 per session for one course of physical therapy from a general provider and $208 per session from a facility that had adopted the regimen designed by the region's leading orthopedic hospital. In contrast, I could hire a personal trainer for weekly half-hour sessions for 13 weeks for $525.

I chose the personal trainer. I asked my surgeon to write his rehab prescription for me and to note the two approaches. I'm confident that if I'd submitted my $525 expense to my Health FSA administrator with the doctor's note, it would have been approved. (I have a Health Savings Account and paid the fee with personal funds to preserve my account balance, so we'll never know for sure. But it's a reasonable assumption that, given the facts and circumstances, the expense would be deemed qualified.)

Vitamins

Tens of millions of Americans have various vitamin regimens designed to keep them healthy. But items that promote general health are not qualified expenses under the federal tax code. Thus, that multivitamin, iron supplement, calcium supplement (see above), digestive aid, echinacea or green-tea extract, or brain stimulant can't be reimbursed from a Health FSA or Health Savings Account.

On the other hand, certain supplements do qualify in specific circumstances, particularly when a medical condition requires higher doses or prevents a patient from absorbing enough of a nutrient from a normal diet. For example, pre-natal vitamins are a qualified expense. So too are vitamin B-12 supplements for patients who've undergone certain bariatric surgery. In these cases, specific vitamins are a qualified expense.

Massage

Massage is another service that fits into this gray area. A weekend with the girls at a spa that includes a massage along with a mud bath, cucumber-oil treatments, and yoga, is not a valid treatment for a medical condition (even stress). Nor is a marathoner's pre- or post-race sports massage to enhance performance or speed recovery.

On the other hand, deep-tissue massage following an injury - say, a pulled groin or hamstring muscle - or as an alternative to the more traditional physical therapy to remove a muscle knot that blocks a nerve to the arm may be a qualified expense if a doctor prescribes it and the treatment is appropriate for that condition.

Don't Push the Envelope

Don't think that a prescription from a doctor alone turns any good or service into a qualified expense. Your doctor may recommend a two-week stay in the mountains or along the beach for your chronic stress, but that's at best a dual-purpose (personal pleasure and medical) item. Norman Cousins prescribed himself massive doses of laughter to overcome a crippling connective-tissue disease, but don't think that you can reimburse your subscription to Netflix from a tax-advantaged health account if you have a similar diagnosis. Laughter is not recognized as a treatment for that disease and an entertainment subscription is a dual-purpose item.

Several years ago, a former Internal Revenue Service official responsible for application of Section 213(d), put it succinctly in a conversation with me. "Any quack with a prescription pad and a pen can write a script for anything. But that doesn't automatically make it a qualified expense."

The Bottom Line

In the case of a non-traditional prescribed course of treatment, the determining factors are whether (1) the good or service prescribed is a recognized treatment for that injury, illness, or condition (2) the patient would incur the expense absent a prescribed treatment. Those two factors reduce dramatically, but don't eliminate, the question of whether the treatment is qualified for tax-free reimbursement.

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