IRS alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs, IRS News Release IR-2024-65 (Mar. 6, 2024)
The IRS has issued a news release reminding taxpayers and administrators of health FSAs, HRAs, HSAs, and MSAs that personal expenses for general health and wellness cannot be deducted or reimbursed under these arrangements because they are not considered expenses for medical care under the Code. As background, Code § 213 defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. Medical expenses do not include expenses that are merely beneficial to general health. The release cautions that if health FSAs or other account-based health plans pay or reimburse nonmedical expenses, then all payments from the plan—including reimbursements for actual medical expenses—are includible in participants’ income.
According to the release, the reminder to follow the rules was prompted by “concerns about people being misled” regarding the circumstances under which food and wellness-related expenses may be reimbursable. The release states that some companies mistakenly claim that doctors’ notes based on self-reported health information “can convert non-medical food, wellness and exercise expenses into medical expenses.” However, such notes do not establish that the expenses are “related to a targeted diagnosis-specific activity or treatment,” as required for otherwise personal expenses to qualify as medical expenses. An example is provided in which an individual with diabetes contacts a company after seeing its advertisement about using pre-tax dollars from a health FSA to purchase healthy food. For a fee, the company will provide a doctor’s note to submit to his health FSA so that he can be reimbursed for the cost of the food. However, the individual’s claim is later denied because the food is not a medical expense “and plan administrators are wary of claims that could invalidate their plans.”
The release directs readers to various resources—including the IRS’s FAQs about nutrition, wellness, and general health expenses—for help in determining whether items or services are medical expenses. The FAQs explain that the cost of food or beverages purchased for weight loss or other health reasons can only be reimbursed if (1) the food or beverage does not 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. Furthermore, the medical expense is limited to the amount by which the food or beverage’s cost exceeds the cost of a product that satisfies normal nutritional needs.
EBIA Comment: This news release may be helpful to those on the “front lines” of plan administration, who are sometimes asked to explain the reasons for operating rules or decisions. Like last year’s IRS guidance on substantiation shortcuts, it also serves as a reminder of the importance of obtaining adequate and appropriate substantiation before reimbursing claims, and highlights the challenges involved with certain expenses. For more information, see EBIA’s Cafeteria Plans manual at Sections XX.D (“Expenses Reimbursed Must Be for Medical Care”), XX.J (“Adequate Claims Substantiation Must Be Received From the Participant and an Independent Third Party”), XX.L (“Health FSA Expenses That Are Difficult to Administer”), 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”).
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
