It's important for all employers who offer tax-preferred health savings vehicles to monitor this developing issue and understand the current rules to avoid running afoul of the law.

HSAs, FSAs and HRAS: Background

Health flexible spending accounts (FSAs) and health savings accounts (HSAs) are funded with pre-tax dollars and allow employees to take tax-free distributions to cover qualified medical expenses. Health reimbursement arrangements (HRAs) are similarly funded by an employer, and similarly reimburse employees for qualified medical expenses without creating tax liability.

For each type of account, the definition of "medical expenses" is found in IRC Section 213(d) and includes 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". Certain transportation and lodging costs can also be reimbursed if they aren't lavish or extravagant and are necessary for obtaining qualifying medical care.

Plan-based restrictions may also apply to limit the types of medical expenses that are reimbursable under the specific vehicle. For example, the terms of certain HRAs only allow the plan to reimburse participants for deductibles or co-insurance under the employer-sponsored health plan. Some limited-purpose FSAs only allow expense reimbursement after the health insurance plan's deductible has been met.

Impact of Dobbs on reimbursing abortion costs

First, it's important to note that Dobbs doesn't actually change the rules on the expenses that can be covered by FSAs, HSAs or HRAs. Absent a change in legislation, the rules on expense reimbursement remain unchanged.

Back in the 1970s, the IRS ruled in Revenue Ruling 73-201 that an abortion performed in a hospital qualifies as medical care because it affects the structure and function of the woman's body. However, it was important to the IRS' decision that the abortion was legal under state law. So, unless the abortion is illegal under state law, the HSA, FSA or HRA may reimburse the participant for an abortion unless the health savings vehicle itself contains provisions that would limit the plan's ability to reimburse abortion-related expenses.

While the answer seems simple, the IRS has yet to resolve the issue of which state law applies for purposes of determining whether the abortion was legal. Given the fact that abortion was legal in all 50 states for decades, it isn't entirely surprising that the IRS has yet to provide guidance on the issue.

A critical issue that is likely to arise in the coming months involves situations where a woman travels from a state where abortion is illegal to a state where it is legal to obtain the procedure in a medical facility. To date, President Biden has issued an executive order requesting that the Attorney General issue guidance on federal constitutional protections for states seeking to allow out-of-state patients to legally receive an abortion.

Under the law as it currently stands, it seems that HSAs, HRAs and FSAs could reimburse women for the reasonable cost of travel to another state to obtain a legal abortion. That includes both reasonable (non-lavash or extravagant) transportation costs.

The plan could also reimburse the woman for lodging costs of up to $50 per night (the $50 limit is a per-person limit, so $100 per night if the woman's partner travels with her) if the procedure is performed by a physician in a hospital or "equivalent facility". The definition of a facility that's equivalent to a hospital is one that has yet to be fully resolved, so it remains unclear whether a procedure performed in an outpatient reproductive health clinic would qualify.

The issues surrounding tax-free reimbursement of abortion costs are complex and far from settled. Republicans in Congress have already proposed legislation that would amend Section 213 so that abortion would not qualify as a deductible medical expense. Employers that sponsor tax-preferred health savings vehicles should continue to monitor this developing area for changes going forward.

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Prof. Robert Bloink has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law. Prof. William H. Byrnes is an executive professor and associate dean of special projects at the Texas A&M University School of Law. Bloink and Byrnes are also co-authors of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.