Much-Anticipated Guidance Didn't Deliver New Information

The Internal Revenue Service recently issued guidance on services qualified for tax-free reimbursement from healthcare accounts. It didn't expand the list, however.

I attended an industry conference 10 days ago when a panelist (thank you, Jody!) announced that the Internal Revenue Service had just dropped (the government word for issued) guidance on expenses that were qualified for tax-free reimbursement from a Health Savings Account, Health FSA, or Health Reimbursement Arrangement. She had read the short guidance and told the audience that it provided little new information. She was right. Instead, it affirms what the industry has long accepted and on which administrators have based their decisions about which expenses in the proverbial gray area are qualified for tax-free distributions from a tax-advantaged health account.

Qualified Expenses

The definition of expenses qualified for reimbursement from a tax-advantaged health account begins with Section 213(d) of the Internal Revenue Code. That passage defines expenses that qualify for the medical deduction on your federal tax return.

The definition includes this passage: "The term “medical care” means amounts paid . . . for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. . ."

That's a broad definition, and the tax code itself doesn't include any examples of qualified expenses. You may have seen an alphabetized list of qualified expenses that your administrator distributed during open-enrollment meetings or includes on its website. The items listed are generally accepted qualified expenses based on the passage above rather than a list derived from the federal tax code.

In addition to items that fall under the definition of Section 213(d), certain other items are qualified for tax-free distribution. They include over-the-counter drugs, medicine, equipment, and supplies. More recently, the list was expanded by Congress to include menstrual-care products.

The New Guidance - Black and White

The new guidance, issued March 17, covers the following items:

Routine medical, dental, and vision exams. These services have always been understood to fall under Section 213(d)'s definition of preventive.

Treatment of alcohol and drug-related substance use disorders. These services have always been understood to fall under the treatment provision of Section 213(d) since alcohol and substance abuse has long been classified as a disease.

Smoking cessation. Because the use of tobacco has been defined as a disease, the IRS guidance has confirmed the industry practice that cessation-related services are defined as qualified expenses because they treat a recognized disease.

Behavioral-health therapy. The new guidance clarifies what has been understood in the industry. General therapy treats mental disease and is considered a qualified expense. The guidance notes that counseling unrelated to a mental disease - the notice references marital counseling - is not considered a qualified expense.

Nutritional counseling. The new guidance clarifies that nutritional counseling that treats a specific disease diagnosed by a medical professional (the guidance lists obesity and diabetes as examples) is a qualified expense. It notes that other nutritional counseling is not a medical expense. The guidance doesn't give an example, but I will:

Example: Nadia, a competitive triathlete, discusses her food intake regularly with her trainer and a licensed nutritionist to improve her performance. Absent a diagnosis from a doctor detailing an illness or condition, a competitive athlete without a diagnosis, she can't reimburse those expenses tax-free from a tax-advantaged health account.

Weight-loss program. The IRS clarifies that weight-loss programs are a qualified expense only if they treat a recognized medical condition diagnosed by a medical professional. It cites as examples obesity, diabetes, hypertension, and heart disease. This guidance clarifies what's been well understood in the industry.

But note that other weight-loss programs are not qualified expenses. Again, the guidance doesn't give an example, but I will:

Example: Your school reunion is approaching, and you want to fit into your old letterman's jacket. You enroll in a program advertised on television that offers portioned entrees and protein-packed shakes. This program doesn't qualify because vanity isn't a medical diagnosis.

Food and beverage for weight loss or other health reasons. Again, the guidance doesn't break new ground. But it does offer important clarification about the three requirements that must be met before these items are qualified for tax-free distributions.

• A physician substantiates the need for these items. You'll need a letter of medical necessity from your doctor to either (1) retain in your records if you withdraw funds from a Health Savings Account or (2) submit to your plan administrator to use Health FSA or HRA funds to purchase the items.
• The food or beverage alleviates or treats an illness.
• The food and beverage doesn't satisfy normal nutritional needs.

If the food or beverage meets all three requirements, it's deemed qualified. But only the portion of the cost above "the cost of a product that satisfies normal nutritional needs" is qualified. This is a difficult calculation for a taxpayer to substantiate. If your special meals cost $25 per day, how much of that expense is above and beyond what you'd spend for a typical day's food? This is an area that's ripe for challenge by your account administrator (Health FSA or HRA) or the IRS during a routine audit of your tax return (Health Savings Account).

Over-the-counter drugs and medicine. The new guidance notes that over-the-counter drugs don't fall under Section 213(d) but that they - and menstrual-care products - are qualified expenses. You may recall that the Affordable Care Act redefined over-the-counter drugs and medicine so that they were not a qualified expense. Legislation passed during the pandemic restored their status as a qualified expense effective Jan. 1, 2020. The same legislation added menstrual-care products to the list of expenses that don't fall under Section 213(d) but are qualified for tax-free distributions. Although it's not mentioned in the new guidance, over-the-counter equipment and supplies - ranging from bandages and C-PAP equipment to walking boots, crutches, and carpel-tunnel splints - are qualified as well.

Nutritional supplements

The final issue that the guidance addresses is nutritional supplements. This is a controversial area. The guidance reaffirms that nutritional supplements are qualified only if they're "recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician." Absent specific examples in the guidance, let me provide several:

Example 1: Your doctor diagnoses you with a calcium deficiency and prescribes two 600 mg. capsules of calcium citrate daily. This is a qualified expense because it treats a recognized medical condition.

Example 2: You underwent gastric-sleeve surgery to manage your weight. As a result of your limited intake of food, you have a Vitamin B-12 deficiency. Your doctor prescribes a B-12 supplement, which is qualified.

Example 3: Your chiropractor sells a program that includes a packet of daily nutritional supplements, including a multi-vitamin, calcium, magnesium, B-12, and other items. This product is not qualified because you haven't been diagnosed by a physician with a specific illness or condition.

Example 4: You self-prescribe a daily multi-vitamin and calcium supplement to promote your general health and reduce the risk of osteoporosis, scurvy, or a vitamin deficiency. These products are not qualified because they promote general health rather than treat an illness or condition diagnosed by a physician.

Example 5: Your local health food store offers tests to determine whether you have a nutritional deficiency. The test indicates that you have a deficiency, and you purchase a supplement to address that issue. This product is not qualified because your condition wasn't diagnosed by a physician.

Here's a rule of thumb: The federal tax code gives you no tax break when you engage in activity or purchase items that maintain your general health. Think a Peloton bike, running shoes, a gym membership, nutritional coaching, or multi-vitamins. But once you're diagnosed with an injury, illness or condition (which might have been prevented if you'd invested in items that maintain your general health), you're entitled to reimburse tax-free goods and services prescribed by a physician that cure, mitigate, or treat that diagnosed medical situation.

Each session of Congress, at least one elected representative files a bill to define nutritional supplements (and often gym memberships, exercise equipment, running shoes, and coaching services to enhance or maintain general health) as qualified for tax-free reimbursement from a tax-advantaged health account. These bills are backed by industry special interests (supplement manufacturers and distributors, plus owners of the 40,000 gyms across the country and their 64 million members). But advocates haven't been able to turn their efforts into law.

The Bottom Line

The basic parameters of a qualified expense are spelled out in Section 213(d): If a product or service diagnoses, cures, mitigates, treats, or prevents an injury, illness, or condition, it's a qualified expense. That's it. Be careful with the prevents condition, as it may lead you astray. Add in over-the-counter drugs, medicine, equipment, and supplies, plus menstrual-care products. Finally, although not discussed above, add travel (mileage or common-carrier ticket fee and parking, but not meals and only limited hotel charges) and you have your list of qualified expenses.

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