By: HUB’s EB Compliance Team

The IRS recently released a private letter ruling addressing whether commercially-available genetic testing is a medical expense. The short answer is “partially.”

The specific question was whether the health information portion of a commercial genetic test could be reimbursed from a health flexible spending account (“FSA”). Health FSAs are tax-favored accounts. Employees contribute to them pre-tax and then can receive reimbursement of IRS-permitted medical expenses tax-free. However, if employees do not use all of the money they contribute in a given year by a specified deadline, they forfeit what is left.

In this case, the genetic test provided both ancestry-related information and health information. The IRS said only the health information portion could be reimbursed from the Health FSA. The rationale is that the health information is a permitted medical expense, similar to a diagnostic test.

However, because there was a single price for the combined ancestry and health information testing, the taxpayer had to allocate the total cost of the test between the health services and the ancestry services. Only the portion allocated to the health information could be paid from the Health FSA. Unfortunately, the private letter ruling does not go into great detail on how to do the allocation. It only says that the taxpayer may use “a reasonable method” to value the health information services.

Some Caveats

While this private letter ruling might appear to give some cover to employers who want to reimburse for these services, caution is in order. As HUB has advised in prior articles, an IRS private letter ruling is only effective for the taxpayer who requested it. It is not official guidance on which employers can rely. This means the IRS could take a different position on an audit. If they did, and said an employer could not reimburse any portion of the test, then the pre-tax deductions and tax-free expenses for all employees in the Health FSA would theoretically become taxable for that year. Still, private letter rulings can be informative of the IRS’s views on a particular issue.

For employers that may want to reimburse the costs of these tests from Health FSAs, there is an additional caution. Because the IRS did not give a formal method for determining the value of the health information services, employers would be well-advised to value them conservatively. Reimbursing for the entire cost of a genetic testing service if it includes both health information services and other services would clearly not be permitted.

Employers with Health FSAs that want to be more conservative and not reimburse any part of the cost of these services may want to amend their Health FSA plans. While Health FSAs may reimburse for all permitted IRS medical expenses, they do not have to do so. Therefore, an employer wanting to avoid the uncertainty and valuation issues may want to amend to exclude all retail genetic testing as a reimbursable expense (or any retail genetic testing that is not exclusively limited to health information).

On its face, it would appear that this rationale could be extended to health plans more generally or health savings accounts (“HSAs”). While that may be true, caution should be taken for the reasons stated above. Additionally, this private letter ruling did not address those types of plans and accounts. While it seems the rationale would be the same, employers are advised to tread carefully since the letter ruling did not specifically address these plans and accounts.

A Note about GINA

On one final note, there are genetic testing vendors that occasionally market themselves to group health plans as an additional benefit. However, employers should be mindful of the requirements of the Genetic Information Nondiscrimination Act or GINA. GINA generally prohibits employers from any of the following:

  • adjusting group premium or contribution amounts on the basis of genetic information;
  • requesting or requiring an employee or an employee's family members to undergo genetic testing; or
  • requesting, requiring, or purchasing genetic information relating to an employee or a family member of an employee for underwriting purposes.

GINA also prohibits employers from using genetic information in employment decision making. GINA is usually not implicated when an employee is merely seeking reimbursement from a Health FSA because the test results are not required for the Health FSA to make the reimbursement. However, if the payment is being made from a group health plan, the group health plan may have access to the test results.

While a full discussion of GINA is beyond the scope of this article, employers looking to add genetic testing as a benefit to their group health plan should consider GINA’s rules and restrictions before doing so.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.