In my 20 years at the IRS, I often was asked: What exactly qualifies as a medical expense? Benefit plan administrators may reimburse an expense for a participant from a health savings account (HSA) or flexible spending account (FSA) only if it is an expense for "medical care" within the meaning of the tax code.
This determination is not always simple. The answers to some basic questions may help.
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How is a medical expense defined?
A medical expense includes an expense for:
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the cure, treatment, mitigation, diagnosis, or prevention of a disease, or the purpose of affecting a structure or function of the body;
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transportation primarily for and essential to medical care;
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premiums for health insurance, including Medicare Part B or D (although premiums are not reimbursable from an FSA or HSA); and,
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qualified long-term care services.
What do some of these terms mean?
Treatment for a "disease" includes not only physical illnesses, but also mental or psychological conditions, learning disabilities, and injuries.
"Diagnosis" evaluates the presence or absence of a disease. Examples include screening tests such as mammograms and colonoscopies, imaging like X-rays and MRIs, and lab tests. It also includes testing for changes in the healthy functioning of the body, like a pregnancy test.
"Mitigation" addresses the effect of a disease on the body. It reduces the severity of the disease or assists a person to perform basic functions. Canes, scooters, bandages, and adult diapers mitigate medical conditions. Paying someone to perform a function that an individual can't perform personally because of a disease, like cleaning house, is not mitigating a disease.
"Affecting a structure or function of the body" includes things like immunizations, contraception, and lactation aids.However, procedures that affect a structure of the body are not covered if the only purpose is cosmetic.
A procedure is cosmetic if it improves appearance but doesn't meaningfully improve the functioning of the body. Therefore, participants cannot be reimbursed for hair transplants or liposuction. However, a procedure like LASIK qualifies because it improves vision, even if losing the glasses makes you look better.
When is an expense for medical care not reimbursable?
Another situation when an expense meets the definition of medical care but is not allowable is when it is for something that is illegal under any law.
So, marijuana may be used for medical purposes but may not be reimbursed, even if legal in a particular state, because it is illegal under federal law.
Another special requirement is that a drug or medicine, even one that can be bought over the counter like aspirin, must be prescribed by a doctor.
When do personal expenses qualify as medical care?
Many items or services that can be used for medical care also can be used for non-medical (personal) reasons. The primary purpose of a medical expense has to be medical, not personal, and it has to be for something the individual wouldn't have purchased except for the medical need.
So, for example, a dog is usually a personal item, but the cost of a service dog for an individual with impaired vision could be a medical expense because it helps the individual function. Educational costs usually are personal expenses, but obtaining information about an illness in order to care for a family member could be for medical care. A car is a personal expense, but the extra cost of outfitting the car for a handicapped driver is a medical expense.
If the purpose of the expense is to promote general good health, as is usually the case with vitamins, a Fitbit, or a gym membership, it is considered a personal expense and not a medical expense. The cost of food that satisfies an individual's nutritional needs also is a personal expense.
Keeping these rules in mind during open enrollment may allow participants to see more savings in the next year of medical expenses.
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