IRS Tells Consumers: A Doctor's Note Alone Is Not Sufficient
By William G. Stuart | Originally posted on LinkedIn for Health Savings Academy
Some expenses for general health may be qualified for tax-free reimbursement from a Health Savings Account. But a Letter of Medical Necessity isn't a guarantee that the product or service is qualified.
Last week, the Internal Revenue Service took the unusual step of issuing a press release [IR-2024-65: IRS alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs (govdelivery.com)] to inform Health Savings Account owners, Health FSA, participants, and account administrators about the limits of Letters of Medical Necessity (LMN) and prescriptions. The agency noted that the LMN alone isn't sufficient to qualify an expense for tax-free reimbursement from a health account.
In recent weeks, the IRS learned that several new companies are testing the limits of determining whether an expense is qualified. One company in particular applies its own determination of what constitutes appropriate medical care to evaluate requests from consumers to reimburse tax-free products and services that fall under the category of general health. This company points to the number of American adults with chronic conditions and cites a growing library of research linking health to better nutrition and exercise, then approves products and services that help promote better health. (To learn more about this company’s position, see an article in the March 8 edition of The Washington Post, printed in its entirety at the end of this column.)
The problem: The federal tax code doesn't recognize many of these non-medical services as appropriate treatment for the diagnoses cited in the LMNs.
Qualified and Non-qualified Expenses
To be qualified for tax-free reimbursement from a health account, a product or service must diagnose, cure, mitigate, prevent, or treat, an injury, illness, or condition. This definition leaves a gray area to accommodate individual circumstances in which a product or services that's normally consumed to promote general health has a medical application.
Example: A vitamin B-12 supplement that a healthy runner consumes as part of a general supplement regimen isn't a qualified expense. But the same pill may be qualified for a person who's undergone bariatric surgery (like gastric sleeve or gastric bypass, which alters the stomach and/or small intestine) and can't absorb enough vitamin B-12 from the volume of food that she now consumes.
Some broad categories of expenses that people would like to reimburse from a tax-advantaged health account are used or consumed primarily for general health. They include vitamins, fitness-club memberships, personal trainers, and healthy food. These items are rarely qualified for tax-free reimbursement, but, in some cases, they may be qualified based on the facts and circumstances of a particular case.
Federal tax law applies certain tests to determine whether an expense in the gray area is qualified:
What is the nature of, and the patient's intent in purchasing, the product or service?
What is the origin of the purchase (who recommended it)?
Is the treatment directly related to the medical condition?
Is the purchase proximate in time to the medical condition?
In addition, the IRS applies the But-for test, which asks whether the individual would have purchased the product or service but for the medical condition.
Example: Following my spinal-fusion surgery five years ago, my surgeon advised me to strengthen my core to support the fused joints. He recommended that I work with either a physical therapist (clearly a qualified expense) at up to $225 per visit or a trainer (usually not a qualified expense) at $190 per month.
I joined my gym several years earlier and never hired a trainer, thereby passing the But-for test. My surgeon prescribed core strengthening. I instructed my trainer that my goal was to strengthen my core, not sculpt my body or train for a marathon. And I started the rehab program immediately after my surgeon cleared me for this activity. Thus, I conclude that my trainer was a qualified expense.
A Health Savings Account owner or Health FSA participant should secure a physician's prescription or LMN to meet requirement No. 2 above (who prescribed this treatment for a specific condition?). The prescription or LMN doesn't automatically qualify the item. Instead, it supports the case as an administrator (Health FSA) or the IRS (Health Savings Account owner or audit of an employer's Health FSA program) determines whether the product or service meets the requirements of a qualified expense.