My Doctor Prescribed It. Is It Now a Qualified Expense?

Prescriptions can turn an item usually considered to promote general health into an HSA-qualified expense. But not always.

Health FSA participants are familiar with the drill. They purchase a product or service that's typically not HSA-eligible, then respond to a request from the administrator to provide a prescription or physician's note to verify that the item has been prescribed to diagnose or treat an injury, illness, or condition. They dutifully comply. Usually, that's the end of the discussion. Usually.

Health Savings Account owners are held to the same rules, although they self-substantiate their expenses.

With either account, an owner or participant who seeks to make a tax-free distribution for an expense for an expense that's generally not qualified must provide documentation that the expense is, in fact, associated with an item that diagnoses, cures, mitigates, treats, or prevents an injury, illness, or condition. xx

Health Savings Account Substantiation

Health Savings Account owners don't receive requests from their administrator to document the medical reason for purchasing a product or service that's not typically HSA-eligible. Owners are responsible for knowing which expenses are qualified for tax-free distributions and which aren't. Neither an owner nor an administrator can request documentation to verify the expense as qualified.

In most cases, this self-substantiation is straightforward. A deductible expense, dental crown, pair of prescription sunglasses, and bottle of over-the-counter allergy medicine are expenses qualified for tax-free distribution from a Health Savings Account (or a Health FSA - the lists are almost identical).

Some expenses fall into a gray area. Common examples are gym memberships, vitamins, and massage. These items typically are for general health and therefore aren't qualified. In some cases, however, they may be an appropriate treatment for an injury, illness, or condition. You, the Health Savings Account owner (or Health FSA participant) must secure and retain documentation in case your purchase is questioned by either the Internal Revenue Service (during a routine tax return audit of Health Savings Account owners) or your plan administrator (for Health FSA participants).

Exploring the Gray Area

Items that are generally used to improve general health and thus aren't qualified expenses may be qualified for tax-free distribution from a Health Savings Account (or Health FSA). But the list probably isn't as large as you might like it to be.

Example: You undergo spinal-fusion surgery. At a follow-up visit, your physician explains that you must strengthen your core to relieve pressure on the fusion site and prevent future problems. She recommends working with either a physical therapist or personal trainer at a gym to develop a core-strengthening routine. You choose the personal trainer because you know her from your health club and her services are less expensive than the physical therapist.

In this example, physical therapy following an injury, illness, or condition is a qualified expense. It's a recognized medical treatment. Working with a trainer, on the other hand, is almost always a service to promote general health - like losing weight, building muscle, or increasing endurance or energy.

But in the scenario above (which I experienced four years ago), hiring a trainer is an alternative approach to receiving care that's considered medical. Whether you choose a physical therapist or trainer, you typically receive an initial evaluation, build a routine to address the medical issue, perform the routine repeatedly in front of the therapist or trainer to ensure that you're doing it correctly, receive periodic evaluations, and eventually are left on your own to build on or maintain progress.

In this case, be sure to consider the expertise of the provider, convenience, and likelihood that you'll stick to your regimen. And remember that your cost for services not covered by your plan (the personal trainer in this example) aren't applied to your deductible. The alternative treatment may have a lower price tag, but you may have a lower net responsibility if you reach your deductible and the physical therapist charges are applied to your post-deductible cost-sharing.

The But For Test

The But For test is designed to ferret out whether you're trying to reimburse a gray-area expense that you would have incurred with or without your injury, illness, or condition, or would not have incurred but for the medical situation. In simple terms, if you wouldn't have received the service or incurred the expense but for an injury, illness, or condition, the expense may be qualified. If it doesn't meet that standard, the expense isn't qualified.

Example: Same facts as the example above, except that you were working with your trainer before your surgery. In this case, the trainer expense probably would not be qualified because you were already working with her. You merely shift some of her and your attention to core-building exercises rather than your former work.

Medical Coverage Versus Qualified Expenses

It's rare that an expense covered by your medical plan wouldn't qualify for tax-free distribution from your Health Savings Account. Insurers typically limit coverage to recognized medical services.

But many medical services that your medical plan doesn't cover may be qualified expenses. Here are some examples:

• Qualified services not covered. Many medical plans don't cover chiropractic care, acupuncture, hearing aids, and foot orthotics. Some dental plans don't cover orthodontia for adults. And most vision plans will cover prescription glasses, but not vision-correction surgery, to address vision issues. These are all recognized treatments and are qualified for tax-free distribution from a Health Savings Account for the appropriate diagnosed condition.
• Services in excess of plan limits. Many medical plans place limits on outpatient (physical, occupations, speech) therapy and chiropractic care (if covered) as a method of managing the benefit. Additional visits not covered by the plan are generally qualified for tax-free reimbursement. The same goes for dental and vision plans, which may cap reimbursements for certain services or place an annual limit on plan payments.
• Alternative treatments. Your medical plan may require you to utilize less-expensive treatments to address an injury, illness, or condition before authorizing more expensive options. For example, the plan may require that you undergo three months of physical therapy before qualifying for surgery or six months of a supervised weight-loss program before undergoing gastric-sleeve surgery. You can bypass these restrictions and choose the more expensive approach, paying for it with tax-free distributions from your Health Savings Account (though the high price may not make this approach financially feasible).

Common Gray-Area Expenses

Many Health Savings Account owners (and Health FSA participants) are conservative and avoid reimbursing gray-area expenses from their tax-advantaged account. Others are more aggressive. Here's a guide to some common services that may or may not be qualified expenses:

Gym membership. Gym memberships generally promote general health and therefore rarely are qualified. Fees may be qualified for tax-free distributions if your physician prescribes a routine to treat a particular injury, illness, or condition (for example, obesity, osteoporosis, or rehabilitation following an injury or surgery). But only if you weren't a member of a health club prior to your doctor's directing you there, your doctor has prescribed a regimen to address the medical condition, and you have a letter from the doctor outlining the plan. Fees are qualified only during the reasonable time to address the injury, illness, or condition.

Vitamins. Most Americans consume vitamins and supplements to promote good health: a daily multivitamin, a calcium supplement to promote bone health, or perhaps melatonin to enhance sleep. Vitamins used to promote general health aren't qualified for tax-free withdrawals. But if a doctor prescribes a vitamin or supplement to address a diagnosis - prenatal vitamins during pregnancy, a calcium supplement after being diagnosed with osteoporosis, melatonin as a treatment for a diagnosed sleep disorder - the item generally becomes a qualified expense. Be sure to retain the doctor's note.

Massage. Most massages promote general physical and mental health. They're relaxing, they loosen stressed muscles, and they promote general blood flow. They're not a qualified expense. But your doctor may prescribe massage to address a recognized medical injury, illness, or condition - for example, deep-tissue massage to promote blood flow or to curb muscle spasms following an injury.

This list is hardly exhaustive.

The Bottom Line

The rule as outlined in the federal tax code is clear: If a product or service diagnoses, cures, mitigates, treats, or prevents an injury, illness, or condition, it's qualified for tax-free reimbursement from a Health Savings Account. But be careful of items that are generally used to promote general health. If your item does address a medical injury, illness, or condition, be sure you have the right documentation - a prescription of letter of medical necessity from a doctor, describing the application of the product or service to your injury, illness, or condition - to justify labeling the withdrawal as qualified.

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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.