IRS Clarifies Ability to Reimburse Certain Programs Under HSAs, FSAs and HRAs

On March 17, 2023, the Internal Revenue Service (IRS) released updated guidance on whether certain costs related to substance abuse programs, exercise programs, wellness and general health qualify as medical expenses under Section 213 of the Internal Revenue Code (Code) such that they qualify for reimbursement under a health savings account (HSA), health care flexible spending account (FSA) or a health reimbursement arrangement (HRA) (each, an Account Based Plan).

As a reminder, Code Section 213 allows expenses for medical care to be paid or reimbursed under an Account Based Plan on a tax-advantaged basis. Participants in an Account Based Plan may contribute pre-tax dollars to their applicable account or receive employer contributions to such accounts tax free, and then use those tax-advantaged dollars to pay for personal or family member medical care. Code Section 213(d) defines medical care to include 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.

The updated guidance from the IRS addresses whether several types of programs are considered medical care and eligible for reimbursement under an Account Based Plan. Programs to treat a drug-related substance use disorder, programs to treat an alcohol use disorder, and smoking cessation programs qualify as medical care because the programs are considered treatment for a disease. However, therapy, nutritional counseling, and weight-loss programs will only be considered medical care if used to treat a specific disease (e.g. obesity). Programs for general health or wellbeing will not qualify as medical care.

The IRS also shines some light on when a gym membership will be considered a reimbursable expense. Only if the gym membership was purchased for the sole purpose of (1) affecting a structure or function of the body or (2) treating a specific disease will the membership be considered medical care. For example, if a membership was purchased for a physical therapy program to treat a specific injury or if the individual has been diagnosed with obesity, hypertension, or heart disease, the individual could reimburse their membership costs under their Account Based Plan. All other purposes for gym membership are considered to be for the general health of the individual and will not qualify for reimbursement. Similarly, the IRS notes that the costs for exercise lessons for the general improvement of health (e.g. swimming lessons), even if recommended by a doctor, will not qualify as medical care.

Finally, the guidance addresses whether certain food and drug products are considered expenses for medical care. A food or beverage item purchased for weight loss or other health reasons is only eligible for reimbursement if (1) it does not satisfy normal nutritional needs, (2) it alleviates or treats an illness, and (3) a physician substantiates the need for the item. Additionally, the reimbursable amount is limited to the cost for the item above the cost of the underlying normal food or beverage product. The IRS also reaffirms that over-the-counter drugs and menstrual care products are eligible for reimbursement. However, nutritional supplements will only be considered expenses for medical care if recommended by a physician as treatment for a specific medical condition.

If you have any questions about this recent guidance, or need help with your HSA, FSA or HRA plan compliance, Foley & Lardner is happy to assist.

As part of Foley’s ongoing commitment to provide legal insight to our clients and colleagues, our Employee Benefits and Executive Compensation Group has a monthly newsletter we call “Employee Benefits Insights,” where we provide you with updates on the most recent and pressing matters concerning employee benefits and other related topics. Click here or click the button to the left to subscribe.