IRS challenges what health item purchases qualify for Medical Expense Reimbursement for tax free HSAs and FSAs

Posted March 12, 2024

As the 2024 tax-filing season begins, the Internal Revenue Service is warning about improper use of tax-advantaged health spending accounts. The agency aims to prevent taxpayers from being misled into thinking general wellness expenses qualify as eligible medical costs.

In a recent press release, the IRS clarified that personal health and wellness purchases—such as weight loss programs, nutritional supplements, gym memberships, and similar expenses focused solely on general fitness—do not meet the requirements to be claimed through pre-tax health accounts.

IRS Cautions Against Misusing Health Accounts for Wellness Purchases

The IRS is cracking down on companies who are misleading consumers about which expenses qualify for tax-advantaged health savings accounts (HSAs) and flexible spending accounts (FSAs). For years, Americans have used these accounts to pay for various health and wellness items like eyeglasses, menstrual products, massagers, acupuncture, and even prescribed fitness equipment. However, the agency believes some businesses are overstepping by providing “letters of medical necessity” that improperly expand eligible purchases.

At issue are companies supplying these doctor’s notes to justify using pre-tax HSA/FSA funds on things like meal plans, gym memberships, fitness trackers, and supplements. While penned by physicians, the IRS is questioning the validity of medical letters based solely on patient questionnaires rather than direct clinical evaluations. The agency states proper documentation requires face-to-face doctor visits, whether in-person or via telehealth.

The IRS says pretax funds aren’t for ‘health and wellness’

An IRS spokesperson asserted food and dietary supplements can only “rarely” be considered qualified medical expenses under strict criteria. There are also concerns about determining if a provider’s physician letter meets legitimacy standards. The IRS maintains that HSA/FSA funds are intended for diagnosed medical treatments, not generalized wellness purposes like nutritious groceries or workout programs touted as fostering overall health.

Unless meeting specific statutory requirements, the agency warns consumers against using tax-advantaged HSA/FSA money for expenses solely promoting general health and wellness. Some companies’ letters may mistakenly characterize ineligible purchases as viable medical costs. The IRS aims to uphold regulations restricting pre-tax spending to qualified medical treatments and expenses.

These accounts, including health savings accounts (HSAs), flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and others, provide tax benefits but have strict rules. Funds can only be used for qualified medical expenses for diagnosed conditions and treatments.

The IRS cautions against companies suggesting wellness purchases are permissible medical deductions or reimbursable through these accounts. While promoting overall health, expenses for nutritious food, exercise regimens, and the like are considered personal costs that are ineligible for preferential tax treatment.

As taxpayers complete returns, the agency urges careful review to exclude improper health account claims that could delay refunds or trigger audits. To ensure full compliance, taxpayers should separate general wellness costs from qualified out-of-pocket medical expenditures.

Some Wellness Firms Dispute IRS Stance on Medical Necessity Letters

The Washington Post wrote about this topic and spoke with Calley Means, co-founder of Truemed, which provides medical necessity letters for HSA-eligible purchases. He argues that the IRS is overreaching with its new guidance. He believes the agency is on tenuous legal ground by questioning some doctors’ assessments and inserting itself into the patient-physician relationship.

Means takes issue with the IRS warning that HSA funds can only “rarely” cover expenses like specialized meal plans and exercise regimens. In his view, this sets an unfair bar compared to other medical treatments and routinely approved prescriptions.

“The agency is making it harder for people to access medically-tailored nutrition and fitness plans through their HSAs than antidepressants or medications like Ozempic,” Means stated. He contends the IRS is overstepping by attempting to override physician determinations about what qualifies as medical needs for a given patient.

The dispute highlights tensions around regulatory oversight of tax-advantaged health accounts and what documentation providers must supply. Companies facilitating medical necessity letters argue their physician evaluations should be sufficient, while the IRS aims to uphold statutory standards determining qualified medical expenses.

Tax rules that favor big pharma drugs over healthy lifestyle and prevention

Truemed’s Means argued and told WP that the IRS stance favors drugs over preventative care sanctioned by physicians. He says using questionnaires to determine medical necessity is standard practice for prescribing pharmaceuticals. Yet, the agency seeks to “confuse and freeze the trend of reversing disease through diet instead of drugs” recommended by doctors.

Means cites multiple Tax Court rulings in which prescribed medical diets qualified as deductible expenses for treating specific conditions like allergies, heart disease, etc. He contends that the IRS’s position that food cannot be medicinal contradicts the government’s own “Food is Medicine” initiative, which promotes nutrition to prevent chronic illness.

“Amid an epidemic of lifestyle diseases crippling Americans, why is the IRS undermining doctors recommending food and exercise interventions as treatment?” Means stated. “This creates an unequal standard favoring medication over prevention sanctioned by a physician.”

The dispute highlights tensions around what counts as qualified medical care under tax-advantaged arrangements. While the IRS aims to enforce statutory standards, companies facilitating medical letters argue the agency cannot override a doctor’s preventative treatment plan for a patient’s diagnosed condition, whether pharmaceutical or lifestyle-based.

Ultimately, courts may need to provide more definitive rulings on the eligibility of physician-prescribed nutrition and fitness regimens as qualified medical expenses. However, the controversy speaks to more significant debates around healthcare’s role in disease prevention and management beyond just medication.

How HSA and FSA Funds Work

Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs) allow millions of Americans to set aside pre-tax dollars for qualified medical and dental expenses. As of 2022, over $116 billion was held across 36 million HSAs, according to Devenir research. About 25% of those with employer health plans use an HSA paired with a high-deductible insurance plan.

It has become common practice for HSA/FSA funds to cover various health and wellness products beyond prescriptions and medical devices. Walmart and Target advertise dietary supplements, sunscreens, and other items as “FSA/HSA eligible” purchases. Dedicated HSA marketplaces sell skin care, fitness trackers, massage guns, and more—products positioned as “surprisingly eligible” expenses.

However, the IRS maintains published guidelines attempting to delineate qualifying medical costs from ineligible personal health purchases. In some cases, determinations remain gray areas open to interpretation. An IRS spokesperson stated that while prescriptions enabling health tracking for a diagnosed condition could qualify, items like food and supplements would only “rarely” meet medical expense requirements.

The rise of companies providing physician-issued letters to certify wellness purchases as treatment plans contributes to disputes over eligibility standards. As the market for tax-advantaged healthcare accounts grows, clarifying regulations around preventative health costs and documentation is becoming increasingly crucial for consumers, employers, and the IRS alike.

How consumers get medical practitioner LOMN letters for HSA purchases

A Letter of Medical Necessity (LOMN) is a document that a healthcare provider can write for an HSA purchase. A LOMN is similar to a doctor’s note and can help with HSA reimbursement for certain products and services. Truemed’s process for obtaining medical necessity letters involves customers completing an online questionnaire detailing their health history and conditions. A remote physician then reviews this information to determine if the customer qualifies for specific products or services to treat or prevent a diagnosed medical issue like diabetes, heart disease, or obesity. If approved, the doctor provides a letter stating that the recommended wellness purchases constitute qualified medical expenses eligible for reimbursement through the customer’s HSA or FSA.

Truemed partners with companies like CrossFit, Equinox, CorePower Yoga, Daily Harvest, and Sakara Life to facilitate these physician-approved wellness regimens and product purchases using tax-advantaged healthcare accounts.

The IRS has issued new guidance on what qualifies as a medical expense for reimbursement through Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). Here’s the breakdown:

Supplements: Only qualify if a doctor recommends treating a specific condition.
Food: Only qualifies if it’s specially formulated for a medical condition and prescribed by a doctor.
Gym Memberships: Qualify if used for physical therapy or to treat a doctor-diagnosed condition like heart disease or obesity.

Concerning Telemedicine: The IRS is concerned about companies like Truemed, which issues “letters of medical necessity” based on online questionnaires, bypassing in-person doctor visits. While the IRS can’t directly enforce these guidelines, they are flagging the practice and may collaborate with the FTC to address potential false advertising. This creates disputes around what constitutes a sufficient physician evaluation and documentation to deem expenses like meal plans, gym memberships, and similar wellness purchases as qualified medical costs eligible for pretax HSA/FSA reimbursement. Clear regulatory guidance may be needed to reconcile digital health realities with statutory requirements.

Key Takeaway: Be cautious about aggressive marketing that promotes everyday expenses as reimbursable medical costs. Always follow IRS rules when using your HSA or FSA funds properly. Or consult a tax professional.