Gym Memberships and Food as Qualified Expenses? Hold on!

A recent article generated some strong feedback among my friends in the benefits industry. Learn why.

One of the hardest truths for potential and actual Health FSA enrollees and Health Savings Account owners to accept is that the federal tax code rewards medical treatments rather than prevention.

A marathon runner who brings her heart rate to the training zone daily, maintains her ideal weight, eats no red meat, follows her naturopath's prescribed vitamin regimen, and consumes leafy greens and beans at nearly meal receives no tax break for the cost of these investments in her health. In contrast, her neighbor who works at a bar until 2 AM, smokes, usually eats wings for dinner at 10 PM and leftover pizza for breakfast at noon, and rides an electric scooter to the apartment complex's mailboxes can deduct all his expenses associated with his blood-pressure and cholesterol medications, and his stress tests and his recent cardiac catheterization procedure.

Not fair? Perhaps. But those are the rules. You want to change them? Talk to your member of Congress.

Pushing the Envelope

A woman recently wrote about an experience with a company that helps tax-advantaged health account owners determine whether an expense is qualified. Here's the relevant part of her narrative:

FSAs have been around since 1978. Policymakers wanted to ease the financial burden of rising healthcare costs on families, and FSAs (which reduce taxable income and overall tax liability) can encourage employees to plan and budget for annual medical expenses. Those expenses don’t include the vitamins, healthy food, or gym memberships that we choose to purchase. 

Should they? Should tax policy encourage and reward my family’s healthier choices by expanding the use of FSAs? Some companies—intermediaries between consumers, FSA providers, and health and wellness industries—think the answer is yes.

One company, featured last month in The Washington Post, invites individuals to complete a two-minute online survey to see if FSA funds can cover certain products and services the company promotes. 

I completed it, curious whether I could use FSA funds for both a gym membership and meal delivery plan. The annual limit for our FSA contribution is $3,200. In 2023, we contributed only $1,500 (we do not have a lot of recurring medical expenses). Basic membership at the gym in 2024 would cost about $700 a year, and I could develop an annual meal delivery service plan that costs about $1,000. 

I answered a few questions about myself and my family history. I focused on preventive options for my occasional migraine headache and arthritis in my neck, as well as the history of heart disease in my family.

The company approved the gym and meal plan for FSA reimbursement. All I had to do was pay the company $30 for a letter, signed by a nurse practitioner, explaining the medical necessity for the services I selected. The documents arrived by email within two hours (here and here). If our FSA provider were to deny reimbursement, the company says it would make up the difference.

You can read the full article here.

Let's look at each item in depth.

Gym Membership

The law is clear about fitness club membership dues. They can meet the definition of a qualified expense if they cure, mitigate, prevent, or treat an injury, illness, or condition. But if you're already a dues-paying member, those dues aren't a qualified expense. Thus, if you joined the gym to participate in yoga classes and your healthcare provider prescribes a cardiovascular and weight-training regimen to treat osteoporosis, only the incremental cost of using this equipment (which is usually nothing) is qualified. Ditto for the shoes and outfits that you wear while you complete these workouts, as they are general-purpose items (equally appropriate for wearing outside the gym).

Here's an excerpt from an Internal Revenue Service FAQ issued in March 2023:

Q10: Is the cost of a gym membership a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? (added March 17, 2023)

A10: Yes, 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 general health of the individual and is not a medical expense.

In this case, it appears that the woman is already a member of the fitness club. Thus, the letter of medical necessity, if the Internal Revenue Service accepted it if it audited the plan, would limit her qualified expenses to any incremental costs. Does she have to insert her credit card to rent the elliptical machine for 15-minute increments? Is she presented with a bill based on pounds lifted when she completes her weight training?

If someone not enrolled in a gym membership presented the same letter of medical necessity, it's a judgment call whether the IRS would recognize these physical activities pursued in a fitness club as an appropriate treatment for migraines. A letter of medical necessity itself is not bulletproof evidence that the expense is qualified. My doctor could prescribe a two-week stay at a Caribbean resort to lower my blood-pressure or reduce my anxiety. But I suspect that the IRS would argue that such a vacation is a general-purpose expense with only a tangential medical benefit.

Recommendation: If you're already a member of a fitness club when you receive a treatment plan, understand that your dues are not a qualified expense period. If there is an additional expense connected to a valid treatment, that incremental cost is qualified.

Example: My family paid monthly dues to a fitness club. Following my spinal-fusion procedure, my surgeon recommended that I work with either physical therapy or a personal trainer to strengthen my core. I hired a trainer at the gym for three months at a price of about $500. I couldn't reimburse the dues because I was already a member, but the cost of the trainer was qualified because it was an incremental charge to treat an existing medical condition.

Nutritious Food

This woman subscribes to a food-delivery service to provide her with healthy food that's free of gluten, dairy, added sugar, or dyes to help her manage a diagnosis of arthritis. This spending is problematic as well.

Let's turn once again to the IRS FAQ published last year to frame this debate:

Q12: Is the cost of food or beverages purchased for weight loss or other health reasons a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? (added March 17, 2023)

A12: Yes, but only if (1) the food or beverage doesn't satisfy normal nutritional needs, (2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost 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 medical expense.

First, do these foods satisfy a normal nutritional need, such as producing calories needed to sustain normal activity? If so, they don't appear to meet the first criterion.

Second, is consuming food without gluten, dairy, added sugar, or artificial dyes a recognized treatment for arthritis? I'll leave that question to the medical community.

Third, is the need substantiated by a physician? In this case, yes, a physician extender, a nurse practitioner, has substantiated the need. But if the expense doesn't meet all other requirements, substantiation by a medical professional is irrelevant. The IRS, not a physician or nurse practitioner, will determine the expense is qualified.

Fourth, even if the three requirements above are met, the qualified amount is limited to the difference in price between a standard product and a comparable item without the proscribed additives. In other words, if a box of pasta costs $1.50 and a gluten-free version is priced at $2.75, the amount qualified for tax-free reimbursement is $1.25, not the full price.

That she's probably paying more for home-delivered food doesn't factor in. After all, a three-view set of x-rays of the left hand is a qualified expense, whether the price is $75 at a free-standing imaging center or $375 at an academic medical center. In the case of the more expensive x-ray or home-delivered food, the patient receives a bigger tax break but still takes a greater financial hit by paying above-market prices.

Recommendation: Be very cautious when reimbursing food through a Health FSA or Health Savings Account. You must thread a needle to ensure that you comply with federal law. And you can't count on a letter of medical necessity alone as a Get out of Jail Free card.

The Difference between a Health FSA and Health Savings Account

Substantiation works very differently between the two most popular tax-advantaged healthcare reimbursement accounts. Because Health FSA reimbursements are limited to qualified expenses, a third-party administrator must review claims. As debit cards have become the preferred means of tapping Health FSA balances, the IRS has permitted administrators to use certain tools (you may be familiar with terms like copay matching and IIAS) to presume that many transactions are qualified. Other expenses, though, require the participant to submit paperwork that includes the date of service, patient name, provider name, service provided, and dollar amount. An employer's program may be audited (though this is extremely rare) to determine whether the administrator has accurately substantiated all qualified expenses.

In contrast, Health Savings Account balances can be distributed for any purchase, though withdrawals for non-qualified expenses are included in taxable income (and subject to an additional 20% tax if the account owner is not disabled and hasn't reached age 65). Account owners self-substantiate. In other words, they, not an administrator, determine whether the withdrawal is for a qualified expense and report their activity on a separate form when they file their personal income tax return. Their financial activity - including their Health Savings Account transactions - are fair game during an audit (which is rare).

The Bottom Line

In the situations discussed in the article, the Health FSA participant and the nurse practitioner really pushed the envelope in determining whether an expense was qualified. She was fortunate that (1) she found a company with an incentive to satisfy its customers' goal of defining an expense as qualified and (2) that the nurse practitioner crafted such a persuasive case. In the end, if her reimbursements come under the scrutiny of the IRS, the participant may or may not like the agency's final determination.

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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 Monday Mythbuster is published every other Monday, alternating with HSA Question of the Week.