IRS Issues Guidance On What Qualifies As “Medical Care” For Reimbursement Under A Health FSA

CATEGORY: Client Update for Public Agencies, Private Education Matters, Public Education Matters
CLIENT TYPE: Private Education, Public Education, Public Employers
DATE: Aug 04, 2022

The IRS issued Information Letter 2022-0005 providing guidance about what qualifies as “medical care” that can be reimbursed under a health flexible spending account (health FSA) or health savings account (HSA).  Since the expenses permitted to be reimbursed by health FSAs and HSAs have changed over time, the IRS guidance provides welcome clarification on how to determine what expenses may be reimbursed.

Section 213(a) of the Internal Revenue Code allows tax deductions for expenses paid for medical care that have not been paid for by insurance.  Section 213(d)(1)(a) defines “medical care” as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.  The Treasury Regulations limit deductions to expenses paid primarily for the prevention or alleviation of a physical or mental defect or illness.  Taxpayers are prohibited from deducting personal, family or living expenses as “medical care” if they do not fall within Section 213’s definition.

In IRS Information Letter 2022-0005, the IRS was asked whether health and wellness coaching for alleviation or prevention of a disease or chronic health risk qualified as “medical care.”  While the IRS did not answer that specific question, the IRS provided guidance that taxpayers should use objective factors to determine whether an expense that is typically personal in nature was incurred for medical care.  The factors may include:

  • The taxpayer’s motive or purpose for making the expenditure;
  • A physician’s diagnosis of a medical condition and recommendation of the item as treatment or mitigation;
  • The relationship between the treatment and the illness;
  • The treatment’s effectiveness;
  • The proximity in time to the onset or recurrence of a disease;
  • Whether the costs are incurred for diagnosing, treating, mitigating, preventing, or alleviation of the taxpayer’s disease;
  • Whether the costs are merely beneficial to the taxpayer’s general health such that they might be considered the taxpayer’s personal expense; and
  • Whether the taxpayer would not have incurred the expense but for the taxpayer’s medical condition.

The IRS’ guidance will help employers and third party administrators determine what expenses are reimbursable as “medical care” for employer-offered health FSAs and HSAs.  For more information, the IRS Information Letter 2022-0005 can be found here: https://www.irs.gov/pub/irs-wd/22-0005.pdf.

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