Gym memberships. Fitness equipment. Red light devices. Supplements. Yoga. Cold plunge tubs. Saunas.

What do these all have in common? They are sold for general health and well-being. And, the IRS has recently alerted taxpayers and health plans that these can only be reimbursed tax-free from a flexible spending account (FSA), health reimbursement arrangement (HRA), and/or health savings account (HSA) under certain circumstances. In its alerts, the IRS reiterates that health care FSAs, HRAs, and HSAs can only be used to pay for “medical” expenses.

What’s Considered a “Medical” Expense?

It’s often obvious when an expense is “medical”. For example, expenses for cancer treatment, prescription medication to treat depression, and a cast for a broken arm typically can be reimbursed by FSA/HRA/HSA with little substantiation beyond proof of the expense. However, general health and well-being expenses do not have an obvious primary medical purpose. Therefore, they must be carefully reviewed before they are paid for by an FSA/HRA/HSA.

Who is required to perform the expense review depends on whether the benefit is an FSA/HRA or an HSA. With an FSA/HRA, expenses are reviewed by a third-party administrator like EBC and/or by the employer sponsoring the FSA/HRA. With an HSA, the HSA accountholder is required to ensure they use their HSA only for qualified medical expenses. If the accountholder uses the HSA for a non-qualified medical expense, they must report the expense as taxable on Form 8889 filed with their taxes and the amount will be subject to an additional 20% penalty tax.

Additional IRS Guidelines

Here are some guidelines the IRS has provided for reviewing general health/well-being expenses:

1. A letter of medical necessity from the individual’s diagnosing and treating physician or health provider typically is required to show that a general health/well-being expense is “medical.” The letter of medical necessity should show that the requirements described below are satisfied with respect to the prescribed treatment.
2. The medical expenses must be “primarily for” the prevention or alleviation of a physical or mental illness or disease. In other words, there must be a clear and direct connection between the individual’s medical condition and the expense. The letter of medical necessity should make the connection clear.
3. The expense is not medical if the individual would have purchased it regardless of their medical condition. This is called the “but for” test, and asks if someone would have purchased the service or product “but for” their medical condition. The letter of medical necessity should indicate that to the provider’s knowledge, the patient would not have purchased the service or product but for their medical condition.
4. The individual’s illness or disease must be diagnosed by a doctor or other health provider qualified to make the diagnosis. An individual’s self-diagnosis is not acceptable to provide that an expense is for medical care. The letter of medical necessity should make it clear that the individual’s condition has been diagnosed by a medical provider.
5. The medical expense must be reasonable in cost and not expensive or lavish. An individual does not have to choose the cheapest option to treat their medical condition, but expenses for medically unnecessary “bells and whistles” would not be considered “medical.” The letter of medical necessity should address which features of a health expense are medically necessary.
6. If the expense is for “prevention” of a particular condition, the letter of medical necessity must clearly explain how the expense involves the immediate and proximate prevention of the condition and that the condition must be imminent.

There are certain circumstances where an FSA, HRA, or HSA can pay for an otherwise ineligible wellness expense. For example, the IRS has said that a gym membership can be “medical care” if it’s for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a special disease diagnosed by a physician (such as obesity, hypertension, or heart disease). In such a situation, an individual should obtain a letter of medical necessity clearly identifying that a disease or injury has been diagnosed by a physician, the gym membership is for the sole purpose of treating the disease or injury, and the individual would not have purchased the gym membership but for their injury or diagnosis.

Alternate Option: Offer an LSA

Even though an FSA, HRA, or HSA cannot generally reimburse wellness expenses, it’s not all bad news! Employers that wish to reimburse wellness expenses that are not eligible for FSA/HRA/HSA payment can do so through a lifestyle spending account (LSA).

An LSA provides taxable reimbursement of various non-medical expenses chosen by the employer to best fit its employee population. Common expense categories for LSAs include fitness expenses, work-from-home expenses, convenience services, financial services, and more. An LSA can cover a much wider variety of expenses than an FSA/HRA/HSA and are subject to far fewer compliance obligations because it doesn’t receive the same tax advantages. Contact your Regional Sales Director or sales@ebcflex.com for more information on adding an LSA to your benefits offering.