QUESTION: We would like to provide our employees with an official, government-approved list of expenses that are eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. Does such a list exist?
ANSWER: Unfortunately, no government publication provides this exact information. IRS Publication 502—Medical and Dental Expenses (Pub. 502) comes the closest, but it should be used with caution. This is because Pub. 502 is written largely to help taxpayers determine what medical expenses can be deducted on their income tax returns; it is not meant to address the tax-favored programs that you mention. Although the rules for deductibility overlap in many respects with the rules governing health FSA, HRA, and HSA reimbursement, there are some important differences. Thus, Pub. 502 should not be used as the sole determinant for whether an expense is reimbursable by a health FSA or HRA, or eligible for tax-free distribution from an HSA. In fact, some portions of Pub. 502 would provide a wrong answer if applied to these tax-favored programs. For example—
Timing Rules. Pub. 502 notes that expenses may only be deducted for the year in which they were paid, but it does not explain the different timing rules for the tax-favored programs. For example, a health FSA can only reimburse an expense for the year in which it was incurred, regardless of when it was paid.
Health Insurance Premiums. Taxpayers may deduct health insurance premiums on their tax returns if certain requirements are met. However, reimbursement of such premiums by health FSAs, HRAs, and HSAs is subject to restrictions that vary according to the type of tax-favored account.
Over-the-Counter (OTC) Drugs. OTC drugs other than insulin are not deductible, but they may be reimbursed by health FSAs, HRAs, and HSAs if substantiation and other requirements are met.
For more information, see EBIA’s Cafeteria Plans manual at Sections XX.D.7 (“Other Guidance Regarding What Is Medical Care: Caution Regarding IRS Publication 502”), XX.D.8 (“Distinguishing Deductibility From Reimbursement of Medical Care Expenses (and Why It Matters)”), and XX.M (“Table of Common Expenses, Showing Whether They Are for ‘Medical Care’”); see also EBIA’s Consumer-Driven Health Care manual at Sections XV.C (“What Is an HSA-Qualified Medical Expense?”) and XXIV.B (“HRAs May Reimburse Only Code § 213(d) Expenses”). You may also be interested in EBIA’s web-based Health Care Expenses Table, which makes it easy for employers, employees, administrators, and others to determine online what expenses will qualify for reimbursement by a health FSA or HRA, or for tax-free distribution from an HSA.
Contributing Editors: EBIA Staff.