By: HUB’s EB Compliance Team

The IRS has issued a news release reminding participants in, and administrators of, health flexible spending accounts (“FSAs”), health reimbursement arrangements (“HRAs”), and health savings accounts (“HSAs”) that personal expenses for general health and wellness cannot be deducted or reimbursed under these arrangements. These general health expenses, such as gym memberships and healthier food, are not considered permissible expenses for medical care and therefore, are not eligible for reimbursement under those accounts.

Background

Section 213 of the tax code defines medical care as amounts paid either: (1) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or (2) for the purpose of affecting a structure or function of the body. Expenses that are merely beneficial to general health do not qualify.

The latest IRS news release cautions that if health FSAs or HRAs pay or reimburse nonmedical expenses, then all payments from the plan—including reimbursements for actual medical expenses—are includible in participants’ income. In other words, the account loses its tax favored status entirely, even for otherwise permitted expenses. This would create tax issues for both the employee and the employer. In the HSA context, the nonmedical expense is subject to regular income tax plus a 20% penalty.

Why now?

Per the IRS, this reminder was prompted by “concerns about people being misled” regarding the circumstances under which food and wellness-related expenses may be reimbursable. Some companies are mistakenly claiming that doctors’ notes based on self-reported health information “can convert non-medical food, wellness and exercise expenses into medical expenses.” It is not so. The mere presence of a doctor’s note does not magically turn otherwise general health expenses into proper medical expenses.

For an otherwise general health or wellness expense to be treated as a medical expense, it must be “related to a targeted diagnosis-specific activity or treatment.” As an example of the impermissible approach, 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. Plan administrators should be concerned that these types of claims could invalidate their plans.

How to Tell

The news release refers to various resources to help navigate these issues, including the IRS’s own FAQs about nutrition, wellness, and general health expenses. The FAQs explain that the cost of food or beverages purchased for weight loss or other health reasons can only be reimbursed from a health FSA, HRA, or HSA if:

  • the food or beverage does not satisfy normal nutritional needs,
  • the food or beverage alleviates or treats an illness, and
  • 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. The food or beverage must meet all three conditions to qualify and many of the current services being marketed only meet the last one. The FAQs provide other examples as well, such as gym memberships.

Conclusion

This news release and the FAQs may be helpful in explaining to employees and others why certain expenses are not reimbursable. Additionally, this shows that substantiation of expenses is necessary (whether for employers, in the case of health FSAs and HRAs, or for employees, in the case of HSAs) to prove that the expenses are proper medical expenses. Employers that administer their own health FSAs should be aware of this and those that outsource to a third party administrator may want to confirm that their administrators are properly handling these reimbursement requests as well.

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

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.