Participants should refrain from using their account-based plans from paying for OTC tests upfront and then seeking reimbursement from their health plan.
To ring in the New Year, President Biden announced a new rule requiring group health plans to cover over-the-counter (OTC) COVID-19 tests with no cost-share to plan participants. This rule, implemented by additional guidance by the Department of Labor (DOL), significantly expanded the initial mandate to cover COVID-19 testing with no cost-sharing under the Families First Coronavirus Response Act (FFCRA).
Under the new rule, group health plans may provide direct coverage for OTC COVID-19 tests (the plan pays the provider of the test directly) or, in the alternative; participants may pay for the test upfront and then seek reimbursement from the group health plan. The upfront payment approach here may be unfamiliar for many plan participants who have never had to pay for their medical expenses upfront and seek reimbursement.
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Unfortunately, this approach also introduces a potential issue. Some plan participants, especially those familiar with the process of paying for medical expenses using their account-based plans, may actually use those account-based plans (i.e. Flexible Spending Accounts, Health Savings Accounts, Health Reimbursement Arrangements) to pay for the OTC COVID-19 tests upfront and then seek reimbursement from the group health plan. This is not permissible and could lead to severe tax consequences for both the individual and the sponsor of the account-based group health plan.
Individuals enrolled in account-based plans may use those funds to pay for qualifying medical expenses under Section 213(d). Guidance from the Internal Revenue Service provides that OTC COVID-19 tests are eligible medical expenses and can therefore be purchased using those funds.
While individuals enrolled in account-based plans continue to have the ability to use those funds to pay for OTC COVID-19 tests, they are better served seeking reimbursement from their group health plan. Given that the group health plan must now cover these tests with no cost-sharing, this option far outweighs the use of an account-based plan where the funds could be used for other eligible medical expenses.
As mentioned above, participants should refrain from using their account-based plans from paying for OTC tests upfront and then seeking reimbursement from their major medical group health plan. This could have severe tax consequences as the IRS expressly prohibits the practice of "double-dipping." Numerous IRS publications, notices, and Code sections support the blanket prohibition against using any account-based health plan for expenses that have been reimbursed from another group health plan.
Furthermore, the blanket prohibition against double-dipping extends to tax deductions as well. Individuals cannot claim a medical expense as a deduction on their tax return if the medical expense is/was also reimbursed by a group health plan. In the event that an individual uses their account-based plan to pay for an expense and then receives reimbursement from another group health plan, the individual will likely suffer a loss of their preferred tax treatment on that expense. Account-based plan sponsors may be impacted as well as this practice could jeopardize the entire plan's tax-qualified status.
While less prevalent, there are still some circumstances where it may make sense to use an account-based plan to pay for some (or all) of the cost of OTC COVID-19 tests. Under the new rule, group health plans may impose some limitations on the reimbursement amount for tests and/or the number of tests covered in a given month. Group health plans are only required to cover eight (8) tests per participant per month (or 30-day period). Furthermore, groups who meet certain conditions may cap their reimbursement amount at $12 per test. If either of these limitations apply, participants may still have an opportunity to use their account-based plans without triggering any tax consequences for "double-dipping."
For example, if the group health plan caps reimbursement at $12 per test, but the cost of the test is greater than$12, the participant could use their account-based plan to pay for the difference in cost. In addition, if the plan limits coverage to eight (8) tests per month, and the participant seeks to purchase additional tests, they could use their account-based plan to pay for any additional tests.
To avoid a bad outcome and potential tax consequences, plan sponsors should clearly communicate the processes in place for individuals to procure OTC COVID-19 tests and clearly outline the process (if applicable) for paying up-front and seeking reimbursement from the group health plan. It would also be prudent to require an attestation that any expenses being reimbursed by the group health plan are not also being reimbursed by any other plan.
Kevin Brady, Esq., is an attorney with The Phia Group. As a member of the consulting team, Kevin works on general consulting, plan document compliance, contract gap reviews, and general compliance issues.
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