These Expenses Are Qualified for Me. But Are They Reimbursable for Thee?

These Expenses Are Qualified for Me. But Are They Reimbursable for Thee?

Some expenses fall into a gray area. Here are several examples.

The rule is well understood among industry insiders: If a product or service diagnoses, mitigates, treats, cures, or prevents an injury, illness, or condition, it's qualified for reimbursement through a Health Savings Account, Health FSA, or Health Reimbursement Arrangement (and deductible as a medical expense on federal tax returns).

But there are some dual-purpose expenses that may or may not be qualified, depending on the circumstances. Let's ponder some examples.

The Federal Tax Code and Qualified Expenses

Let's start with a few facts about qualified expenses to level-set our discussion.

First, there is no magic one-page, two-sided alphabetized list of qualified expense recognized by the Internal Revenue Service. Your reimbursement administrator probably posts such a document on its website and perhaps in an enrollment packet for your convenience. But that list is created by the administrator and isn't necessarily exhaustive. The IRS does annually update Publication 502 - a document that lists and describes services that are qualified (and some common non-qualified services as well) for the federal tax deduction. This list is a descriptive and lengthy (28 pages) - good for an in-depth discussion of certain expenses (such as when a wig, tuition, and weight-loss programs) are qualified - but doesn't pass muster as a quick guide.

Second, there is no distinct Health Savings Account list. Don't worry if you didn't know that. Some members of Congress don't - like the Republican member of the House of Representatives who introduced a partisan bill to prohibit Health Savings Account owners from withdrawing funds without paying income taxes or penalties to pay for the voluntary termination of pregnancy. Yes, there are some qualified expenses that apply to Health savings Accounts but not Health FSAs or integrated HRAs (for example, medical premiums when collecting government unemployment benefits or continuing coverage on a group plan by exercising COBRA rights). But among standard services that diagnose, mitigate, treat, cure, or prevent an injury, illness, or condition, what's qualified for one of these tax-advantaged accounts is qualified for all three (and the federal tax deduction).

Third, it helps to understand this concept: When you take steps to maintain your health - invest in a gym membership and running shoes, eat pricier organic food and plant-based meat substitutes, ingest general vitamins - you can't reimburse those expenses tax-free from any tax-advantaged account. Those services merely promote general health. A crude way of looking at this situation: The tax code does you no favors when you work hard and invest money to maintain your health. But if you don't make that financial, emotional, and time investment and suffer a decline in your general health, you can reimburse tax-free a range of services that help you regain health.

Personal Trainer

An extension of the previous paragraph is the hiring of a personal trainer. (Harken back to the Seinfeld episode in which Izzy Mendelbaum ties Jerry to the back of a convertible and orders him through a workout in Central Park.) Most people hire personal trainers to achieve better health, such as strengthening and toning their core, losing weight, or increasing performance in a specific sport like golf or running, etc. Those objectives fall under the heading of general health and therefore aren't qualified expenses.

I hired a personal trainer last year. Following my spinal-fusion operation, my surgeon told me that I needed to strengthen my core to reduce pressure on the affected joints (L4/L5/S1, or the bottom of the back for those of you unfamiliar with the labeling of vertebrae). He prescribed sessions with either a physical therapist or a personal trainer at a facility with weight machines and resistance equipment. He left the choice of instructor/mending partner to me, but suggested that a trainer in a gym might be more interesting. I hired a trainer for three months of weekly sessions.

Had I hired a personal trainer as a healthy person looking to strengthen my core to look better at the beach or at a class reunion, the expense wouldn't have qualified for tax-free reimbursement from a Health Savings Account, Health FSA, or HRA. But because I was strengthening appropriate muscles around a surgically repaired body part, this expense is - I believe - qualified.

I add that qualifier ("I believe") because I didn't seek IRS guidance in the form of a Private letter Ruling (a process in which a taxpayer lays out the case for an expenses' being labeled qualified and the IRS issues an opinion that applies only to that taxpayer). But Because I was recovering from surgery and needed to strengthen muscles to alleviate pressure on my lower back, the doctor had recommended this activity in writing, and the same services performed by a physical therapist absolutely are qualified, I feel confident that I could reimburse the expense ($192 per month for three months) tax-free from my Health Savings Account.

I stopped going to the trainer after three months because I had the information that I needed to continue my work independently. If I'd continued with the trainer, it's unclear when those later visits would begin to get back to the gray area.

If you (or I) were healthy and hired a personal trainer to strengthen your core because you wanted to drive a golf ball farther, play tennis better, or increase your endurance, that expense wouldn't be qualified. Thus, qualified for me but not for thee (or an already healthy me).

Vitamins

Have you fund a regimen of vitamins that keeps you more active, alert, and in tip-top condition? Congratulations. You'll lead a more fulfilling physical (and probably mental) life than those who attempt to ingest the vitamins and minerals by starting their day with bran muffins, coffee, and fruit-on-the-bottom yogurt.

But there are some vitamins that mitigate a condition. For example, pre-natal vitamins, particularly folic acid, are important for pregnant women whose bodies are the source of nutrition for two lives. But I've never been pregnant.

On the other hand, I have undergone bariatric surgery. As a result of my surgery, my digestive track's ability to absorb Vitamin B-12 is lessened. Therefore, I take a daily 5,000-mg. supplement. Because I now have a specific condition and a particular supplement directly addresses that issue, my Vitamin B-12 supplements are qualified for tax-free distributions from a tax-advantaged account. I buy the supplements in 300-unit bottles for about $10, so the tax savings aren't great. But I can make tax-free withdrawals.

Documenting Your Case

If you seek reimbursement for these dual-use products from your Health FSA or HRA, the administrator will most likely ask for specific paperwork to substantiate the medical case for tax-free reimbursement. This paperwork usually takes the form of a state-licensed provider's prescription or a letter of medical necessity from a licensed practitioner.

If you have a Health Savings Account, you're responsible for substantiation. Neither your administrator nor an employer can require the TPA to withhold your request for withdrawal pending your submission of supporting documentation. Unlike a participant in a Health FSA or HRA, a Health Savings Account owner can withdraw funds for any expense at any time (subject to taxes and possible penalties if the distribution isn't for a qualified expense). You would need to keep the prescription or letter of medical necessity or discharge orders with your tax documents in case of an IRS audit of your personal income tax return.

The mere presence of written documentation, however, doesn't make tax-free reimbursement an iron-clad case. As one IRS official once told me, "Any quack can write a script." Your behavioral therapist may subscribe a weekend at a mountain spa with a mud bath and full-body massage. Good luck trying to substantiate that withdrawal. On the other hand, a prescription for deep-tissue massage as an alternative or complement to physical therapy probably would pass muster.

The Bottom Line

Confession: I didn't reimburse my trainer fees from my Health Savings Account, nor do I use my debit card to purchase my Vitamin B-12 supplements. That's not because I'm risk averse, but rather because I'm a saver and want to preserve my account balances to reimburse qualified expenses tax-free in retirement, when I won't have the income that I enjoy today and reimbursements from my Health Savings Account won't be counted in the formulas that set surcharges for Medicare premiums or the percentage of my Social Security benefit that's taxed. I retain these receipts so that if I need to tap these funds to pay for a non-qualified expense, I can match the withdrawal against a qualified expense that I could have reimbursed but didn't so that I don't pay taxes or penalties on the withdrawal.

A general rule: If you're not sure whether an expense is qualified, think hard about not making a withdrawal. Even if you accumulate a balance of $100,000 or more in your account (few Health Savings Account owners do, though the number will increase every year as more owners hold and fund their accounts for a longer period), you're unlikely to save enough to cover all your qualified expenses in retirement. Better to let your balances grow through investments and have financial resources to tap in retirement than to spend the funds on gray-area expenses today and risk taxes and penalties.

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #HealthSavingsAccount #TaxPerfect #yourHAcademy #yourHealthSavingsAcademy


William G. (Bill) Stuart

Nationally recognized expert on reimbursement account strategy and compliance, particularly Health Savings Accounts and ICHRAs 🔹Writer🔹Author🔹Speaker🔹Educator🔹Strategist

1y

Ah, the "gray area" of reimbursement. When you own a Health Savings Account and are in doubt about whether an expense is qualified, the better option may be to preserve your balances for expenses that you know can be reimbursed tax-free.

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