The IRS generally allows taxpayers to take a deduction for expenses they paid during the taxable year for medical care—as long as they’re “qualified medical expenses.” Alternatively, these medical expenses can typically be paid or reimbursed under a health savings account (HSA), health flexible spending arrangement (FSA), Archer medical savings account (Archer MSA) or health reimbursement arrangement (HRA).
The IRS recently issued updated guidance to provide further clarity on which expenses qualify.
According to the FAQs, the following are generally reimbursable from an HSA, FSA, Archer MSA, or HRA:
- Dental exam
- Eye exam
- Physical exam
- Nonprescription over-the-counter drugs and medicines, including nonprescription insulin. (It’s notable that nonprescription over the counter drugs, other than insulin, are not eligible for the medical expense income tax deduction.)
- Menstrual care products
- Program to treat a drug-related substance use disorder
- Program to treat an alcohol use disorder
- Smoking cessation program
- Therapy session for the treatment of a disease (e.g., to treat a diagnosed mental illness)
- Nutritional counseling that treats a specific disease diagnosed by a physician (e.g., obesity or diabetes)
- Weight-loss program that treats a specific disease diagnosed by a physician (e.g., obesity, diabetes, hypertension, or heart disease)
- Gym membership that is 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)
- Food or beverages purchased for weight loss or other health reasons, where (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 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
- Nutritional supplements recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician
- Certain costs associated with fertility treatments incurred for the medical care of the taxpayer, their spouse, or their dependent
According to the FAQs, the following are generally not reimbursable from an HSA, FSA, Archer MSA, or HRA:
- Cost of exercise for the improvement of general health (even if recommended by a doctor)
- Therapy session not required for treatment of a disease (e.g., marital or family counseling)
- Certain costs associated with fertility and surrogacy treatments incurred for the medical care of third parties
Note on FSA substantiation requirements
To help avoid having an FSA reimbursement taxed as wages, expenses should be fully substantiated by an independent third party. This substantiation information should include:
- Description of the service or product
- Date of service
- Amount of the expense
You should also certify that any expense paid by the plan hasn’t been previously reimbursed by insurance or otherwise, and that you won’t seek reimbursement from any other plan covering health benefits. An explanation of benefits from an insurance company that provides your share of the cost of care (copay, coinsurance, and/or deductible) meets this need.
The following have been identified as potentially questionable practices that don’t meet the substantiation requirements.
- Self-certification by the participant as to whether an expense qualifies for reimbursement
- Only requiring independent third-part substantiation for some or certain expenses “sampling”, rather than requiring proof for each one
- Not requiring substantiation for expenses below a certain threshold (de minimis charges), as all expenses, no matter how small, must be substantiated
- Not requiring substantiation from certain favored providers
- Allowing a participant to submit a form in advance of receiving dependent care services, attesting to the amount of dependent care expenses they will incur in the upcoming year and only requiring further notification if change occurs
Keep in mind, expenses paid with debit cards must also meet the same substantiation requirements. Some debit card expenses can be “auto-substantiated”. The term auto-substantiated refers to medical expenses that may be approved without additional substantiation under the proposed cafeteria plan regulations. See the IRS memo for more information on auto-substantiation.
Speak to your advisor if you have questions about qualified medical expenses. If you don’t have an advisor and are interested in learning more about Goldman Sachs Ayco Executive Financial Management? Contact us today.
