- On March 11, 2024
The Internal Revenue Service (IRS) recently issued guidance reminding both taxpayers and health spending plan administrators about what constitutes permissible medical expenditures eligible for deduction or reimbursement from health flexible spending arrangements (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs), or medical savings accounts (MSAs). According to the IRS, this reminder is necessary because some companies misrepresent the circumstances under which consumers can use their health spending accounts to pay for food and wellness expenses. If people and/or health plan administrators fall for such claims, this could result in significant tax penalties.
Normally, personal expenses for general health and wellness are not considered medical expenses under the federal tax code. So, people cannot use FSA, HSA, HRA, and MSA funds to pay for them. However, the IRS has observed an increase in aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement even though they don’t qualify as medical expenses.
These companies claim that a ‘doctor’s note’ they provide, based on self-reported information, can convert non-medical food, wellness, and exercise expenses into legitimate medical expenses. In reality, the IRS states, “Such a note would not establish that an otherwise personal expense satisfies the requirement that it be related to a targeted diagnosis-specific activity or treatment; these types of personal expenses do not qualify as medical expenses.”
To clarify, the IRS gives this example:
For example, a person with diabetes trying to control blood sugar might see an advertisement from a company stating that he can use pre-tax dollars from his FSA to purchase healthy food if he contacts that company. He contacts the company, who tells him that for a fee, the company will provide him with a ‘doctor’s note’ that he can submit to his FSA to be reimbursed for the cost of food purchased in his attempt to eat healthier. However, when he submits the expense with the ‘doctor’s note,’ the claim is denied because food is not a medical expense, and plan administrators are wary of claims that could invalidate their plans.
Coming into tax season, this reminder is very important. If a person uses their FSA, HSA, HRA, or MSA funds for a non-medical expense, then their account can be disqualified, meaning all payments made to taxpayers under the plan, including reimbursements for legitimate medical expenses, become taxable income. So, any individual with an account-based plan should be very careful about what they use account-based debit cards to pay for, and any administrator of an account-based health spending arrangement needs to be scrupulous about not approving “medical” claims based on fraudulent advertising.