How Does the Supreme Court's Dobbs Decision Affect HSA Reimbursement?

The Supreme Court altered the abortion landscape with the Dobbs decision. What does it mean for your reimbursement account?

The Supreme Court issued its ruling in Dobbs v. Jackson Women's Health Organization in late June that changes the rules around voluntary termination of pregnancy. The decision abruptly ended a 49-year period during which abortion was deemed a constitutional right at the federal level. As a result of the Dobbs decision, the issue reverts to each individual state to determine whether it wants to place restrictions on the timing (whether measured in time or fetal viability) or circumstances (such as rape, incest, and the health or life of the mother) of termination-of-pregnancy services.

Beyond the raw emotions expressed by people across the political spectrum, the decision has practical effects on Health Savings Account owners and participants in other tax-advantaged medical accounts. Invalidating a single national standard and returning the issue to the states will most likely result in different laws in many states and fluidity as each election cycle brings in a new group of legislators that may propose subtle or substantial changes to each state's laws.

Let's examine this issue purely from the perspective of reimbursement accounts under the federal tax code.

Section 213(d)

If you own a Health Savings Account or have participated in your employer's Health FSA, you've probably heard the term Section 213(d), as in "you can reimburse all Section 213(d) expenses tax-free." Section 213(d) of the Internal Revenue Code doesn't include an alphabetical list of all services that are considered medically necessary and therefore qualified expenses. Those lists are created and maintained by account administrators.

Instead, the federal tax code defines as qualified expenses any outlay "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body," as well as certain transportation to medical appointments and certain insurance premiums.

This definition was written into the federal tax code long before Health Savings Accounts, Health FSAs, and Health Reimbursement Arrangements were created or recognized under federal tax law. The section describes the expenses that are qualified for the federal medical tax deduction. Those same expenses (with some minor account-specific exclusions) are qualified for tax-free reimbursement under a tax-advantaged medical reimbursement account.

Congress (and perhaps the Internal Revenue Service) could alter the definition of Section 213(d) to exclude abortion from the list of qualified expenses. Some anti-abortion advocates have proposed this change. But even the Trump Administration didn't have the appetite to consider such an administrative change. And the leaders of the anti-abortion movement (actually, one woman who controls the Republican congressional caucus on this issue) aren't in favor of this change to the tax code.

An Attempted Carve-out

Several years ago, Rep. Virginia Foxx (R-VA) introduced legislation that would exclude any expenses related to abortion from the list of expenses qualified for tax-free distribution from a Health Savings Account. This effort died quickly. Had it passed, it would have represented the first medical service covered under Section 213(d) that would have been excluded from the list of Health Savings Account qualified expenses.

Health Savings Accounts

Health Savings Account owners are responsible for all distributions from their accounts. Neither their employer nor the account provider can narrow the list of qualified expenses.

But the Dobbs decision affects Health Savings Account owners. Tax-free distributions are limited to qualified expenses legally available where purchased. This legally available term doesn't come into play when an account owner purchases contact lenses, a dental crown, or an MRI. But it becomes relevant when, for example, an owner purchases medicinal marijuana, which is legal in many states. Marijuana is a Schedule I substance under the federal Controlled Substance Act. According to the federal Drug Enforcement Administration, marijuana "has a high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use under medical supervision." Thus, marijuana isn't an item qualified for tax-free distribution from a Health Savings Account (or other reimbursement account governed by the federal tax code).

Termination-of-pregnancy services fall under the same category, though with a twist. Abortion is no longer governed by federal law, but rather by the law in each state. If the procedure and related services are legally obtained in a state, the expenses are qualified for tax-free distribution from a Health Savings Account (and other reimbursement accounts). This tax status likely holds even when a patient living in a state that restricts the procedure travels to a jurisdiction in which termination of pregnancy is legal.

The law doesn't permit third-party substantiation of Health Savings Account withdrawals to ensure that they're for qualified expenses (or that the owner is listing non-qualified distributions as such and paying taxes and penalties). Thus, it's up to the account owner to know which expenses are qualified. It's a good bet that most owners will know the laws related to abortion in their state of residence (and state in which they receive services, if different).

Health FSAs

Because Health FSAs are employer-sponsored medical plans under federal tax law, companies can narrow the list of qualified expenses. Thus, an employer can exclude abortion services and travel from reimbursement through its Health FSA. Some employers in states that restrict abortion may choose to alter their plans to exclude these services.

The difficulty is that the third-party administrator may not be able to identify services related to abortion. These procedures are billed using codes that apply to abortion and other gynecological services. An administrator may have no way to determine whether the codes apply to services that are or aren't legal in the state in which the service is rendered.

Further, administrators typically aren't equipped to understand the nuances of each state's laws. An issue like medical marijuana has a national standard. In contrast, many states will enact different laws with respect to when during the pregnancy and under what circumstances abortion is legal or illegal.

Health Reimbursement Arrangements

HRAs are also employer-sponsored plans. Therefore, companies can narrow the list of qualified expenses, as they can with Health FSAs.

At the same time, an HRA integrated with a medical plan may be used to achieve a very different outcome. Following the Hobbs decision, a handful of prominent national companies announced that they would provide employees living in states that restrict abortion with funds to travel and undergo the procedure. If these expenses are not covered by the medical plan, they can be reimbursed tax-free through an HRA tied to the medical plan. The downside to this approach for some employers is that the benefit is limited to workers enrolled in the company's medical coverage.

Employers also have discretion over the design of two newer HRAs, the Individual-Coverage HRA (ICHRA) and Excepted-Benefits HRA (EBHRA.

An ICHRA is designed to reimburse tax-free medical premiums for plans that employees purchase in the nongroup market. But one design variation allows employees with any remaining balances after they pay premiums to reimburse any Section 213(d) expense. Employers who offer ICHRAs have the option to exclude reimbursement of abortion services to the extent that a third party can identify the services if they allow reimbursement for services in addition to premiums.

Employers can give employees up to $1,800 annually in an EBHRA to reimburse Section 213(d) expenses generally or a narrower list (such as dental services as an alternative to traditional employer-sponsored dental coverage). The low limit may not be as generous as employers desire, but they can offer an EBHRA to all employees eligible for benefits (rather than limit the benefit to employees enrolled in the company's medical plan).

The Bottom Line

Medical coverage - both traditional insured and self-insured group medical plans, as well as reimbursement accounts - will be in a dynamic state during the next few months as insurers and employers determine how their companies will respond to this new set of rules. Some things are certain (abortion is no longer a protected right under federal law), but we'll see many changes to laws, medical plans, and reimbursement accounts. And change will become a permanent fixture in this aspect of the law unless a new legal challenge results in a different future Supreme Court decision that once again creates a national standard.

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