The IRS recently issued a warning to taxpayers and health plan administrators cautioning against certain companies misrepresenting personal expenses for nutrition, wellness, and general health as medical expenses under the tax law.
The warning has been issued in light of aggressive marketing tactics suggesting that personal expenses, like reduced-calorie foods, are eligible for deductions or reimbursements under health savings accounts (HSAs), health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and medical savings accounts (MSAs).
However, the IRS has made it clear that this is not the case.
Concerning trends
The alert came after the IRS discovered an alarming trend. Some companies marketed their products to customers, claiming that doctor’s notes based on self-reported health information can transform non-medical items into tax-advantaged medical expenses. To illustrate the issue, the IRS provided a simple example:
A diabetic individual attempting to control their blood sugar by consuming low-carb foods may be led astray by a company's advertisement suggesting they can use pre-tax dollars from their FSA to buy healthy food. The company might offer a 'doctor's note' for a fee to submit to the FSA for reimbursement of the food cost. However, this claim would not qualify as a legitimate medical expense.
For an otherwise personal expense, like food, to be considered a qualified medical expense, it must be related to a specific diagnosis or treatment.
Understanding health spending plans
The IRS cautions that misusing health spending plans for non-medical expenses can have significant tax implications.
Health spending plans that pay or reimburse non-medical expenses are not considered qualified plans. If a plan is not qualified, all payments, including reimbursements for actual medical expenses, become taxable income.
Consequently, a taxpayer who falls victim to these misrepresentations could be taxed for all expenses paid or reimbursed by their plan, not just the non-qualified expense.
Resources
Taxpayers and health plan administrators are encouraged to review the IRS's frequently asked questions on medical expenses relating to nutrition, wellness, and general health to determine if an expense qualifies as medical. The IRS provides extensive information on the requirements for deductibility of medical expenses, including Publication 502, Medical and Dental Expenses. This is a valuable resource for those seeking to manage their healthcare spending accounts responsibly.
This article provides a brief summary of an IRS alert on the misrepresentation of health expenses. It’s not an exhaustive review of qualified health plans or their covered expenses. If you would like to know more about qualified health plans or have any further questions, please contact our office.