Whoa! You Want Health Savings Accounts to Reimburse What?
Special interests want to expand the range of products and services that can be reimbursed tax-free from a Health Savings Account.
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The List of Qualified Expenses
There is no unique list of HSA-qualified expenses in the federal tax code. Rather, the list closely follows Section 213(d) of the Internal Revenue Code, which broadly defines the types of services that can be deducted on federal income taxes. Under current tax law, taxpayers with high medical expenses in a tax year who itemize their deductions (rather than choose the standard deduction) can deduct their qualified medical expenses
This same range of expenses, included in IRS Publication 502, Medical and Dental Expenses (updated and released annually), serves as a guide for products and services that can be reimbursed tax-free from a Health FSA or a Health Reimbursement Arrangement (though a company can narrow the list for those plans because they're employer-sponsored).
As the number of Health Savings Accounts (more than 36 million) and the associated balances (more than $100 billion) grow, more interest groups want to tap into this money by having the products that they sell or buy be included in the list of expenses qualified for tax-free distribution.
Fitness Clubs and Fitness Equipment
In every recent session of Congress during the last 16 years, a member has introduced a comprehensive Health Savings Account bill that includes a provision to permit account owners to reimburse gym membership and exercise equipment (including stationary bicycles, treadmills, and performance shoes) tax-free from their accounts. The rationale is simple: Regular aerobic movement, resistance training, stretching, and similar activities promote health. It's hard to argue with this logic.
The federal tax code doesn't recognize as qualified any products or services that maintain good health or promote better health. Instead, the federal tax deduction is limited to products and services that diagnose, cure, mitigate, or treat an injury, illness, or condition. Part of the reason is doubtless practical. After how, where do you draw the line? At a new tricycle? A traditional walking lawnmower rather than a sit-down model? A rowboat or kayak rather than a motorboat or sailboat? A resort spa that has a few treadmills and rowing machines tucked in the corner?
A logical case certainly can be made to encourage people to purchase fitness club memberships and equipment to promote their health and reduce their accessing care in the "healthcare" system. But this effort should be part of a broader restructuring of the healthcare system and the medical deduction under the federal tax code, not a specific provision applying only to health accounts.
Today, gym memberships may be a qualified expense on a case-by-case basis, but only if the taxpayer wasn't previously a member, a doctor prescribed this treatment, the taxpayer has a documented injury, illness, or condition that's appropriately treated by equipment in a fitness club, and the physician prescription is proximate in time to the symptoms. That's a pretty high bar that only a few fitness-club members can reach.
Vitamins
Vitamins are the fraternal twin of fitness clubs and memberships. A case can be made that supplements promote good health
The issue is that vitamins are usually consumed by healthy people who want to maintain their health, not patients with a deficiency of vitamins, minerals, or amino acids. Thus, they don't meet the standard of diagnosing, curing, mitigating, or treating an injury, illness, or condition.
Today, some vitamin regimens can meet the standard as a qualified expenses in individual situations. Examples include folic acid supplements for a pregnant woman, a calcium supplement for a patient diagnosed with osteoporosis, and a Vitamin B-12 for a patient who's undergone bariatric surgery. A Health Savings Account owner would be wise to secure and retain documentation from a medical professional to support reimbursing this expense tax-free.
Youth Sports Fees and Equipment
Congress recently received a report from the U.S. Commission on the State of US Olympics and Paralympics that recommended using federal tax dollars and other resources to increase the nation's investment in youth sports. Among the policy initiatives: "Congress should [make] certain costs associated with youth-sports participation tax-deductible, including program fees, the cost of necessary equipment, and funds spent on travel for competitions. Such a deduction should be made available to all parents and guardians of primary- and secondary-school students. Permitting Americans to use pre-tax funds set aside through Health Savings Accounts and Flexible Spending Accounts for fitness and sports-related costs, such as recreational-league signup fees or a dependent child’s sports equipment, would also be a positive step forward."
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In other words, Health Savings Account owners and Health FSA participants should be permitted to make tax-free withdrawals to pay participation fees and reimburse the purchase of cleats, high tops, bats, water polo caps, shin and shoulder pads, lacrosse sticks, fencing epees, batting gloves, goalie pads, tennis rackets, polo mallets, and javelins.
This proposal follows the 2021 introduction of the PFIT Act by lawmakers in both the House (Rep. Ron Kind, R-WI) and Senate (Sen. John Thune, R-SD). This bill defined many of these same expenses as qualified, up to $1,000 per individual and no more than $2,000 per family annually. It did not become law. [Note: This is a difficult benefit for Health FSA and HRA administrators to manage because it would require reconfiguring information systems to create a subcategory of qualified expenses with a separate cap below the overall account value.]
The rationale here is obvious: Youth sports can be expensive. Hard-working families struggle to fit these fees into their budget. Allowing tax-free reimbursement from a health account would reduce the net cost.
Today, these expenses never meet the definition of a qualified expense.
Final Expenses
The most recent entrant into the field is the National Association of Funeral Directors, which advocates allowing families to distribute funds tax-free from the decedent's Health Savings Account to pay for funeral and burial expenses.
The rationale is straight-forward: Many families can't afford to honor and bury a loved one. A Health Savings Account is a quick source of cash at the time of death. The balance is distributed, per the decedent's instructions, to either a spouse (the funds pass tax-free and remain tax-protected) or to another person or an entity (the balance is liquidated, and funds are distributed to the beneficiaries, who may incur a tax liability). If surviving family members were permitted to pay funeral and burial expenses from the late family member’s Health Savings Account with no negative tax consequences, families would have a source of cash to pay final expenses.
This provision would apply to Health Savings accounts only.
Under current law, no funeral or burial expenses can be reimbursed tax-free from a Health Savings Account. But family members can withdraw funds tax-free from the account to pay a deceased owner's final medical expenses (like Medicare premiums, medical-plan cost sharing, dental and vision expenses, and over-the-counter drugs, medicine, equipment, and supplies). Families that utilize this provision create dollar-for-dollar savings that they can apply to the decedent’s final expenses.
Trade-offs and End Points
An issue that runs through these attempts (except final expenses, because the owner has no future financial needs) to expand the list of qualified Health Savings Account expenses is that each pulls money from the account for an expanded list of non-medical expenses, leaving less money to pay for future qualified products and services that diagnose, cure, mitigate, or treat a medical, dental, or vision illness, injury, or condition. Whether it's lifetime savings (a Health Savings Account) or an annual election (Health FSA), those funds - and the corresponding limits on contributions and elections - are designed to reimburse necessary medical care.
Imagine buying several extra graphite hockey sticks or foils for your young hockey player or budding fencer, then scrambling to pay the out-of-pocket financial responsibility for an inpatient stay following surgery or several rounds of chemotherapy.
The Bottom Line
If the list of qualified expenses is expanded to include products and services used primarily to maintain general health, recreation expenses and funeral costs, the obvious question is, "What's next?" At what point do health accounts become little more than a tax-free spending account to pay for services even farther removed from the traditional view of qualified medical expenses? And when they do, what are the consequences when spendthrift politicians seek to increase taxes or rein in existing tax benefits to fund new programs?
A case can be made for redefining the way that the tax code views nutritional food, supplements, and exercise as key factors in promoting health, which in turn reduces expensive medical intervention. But that effort must focus on the tax code itself and the medical deduction, with spillover benefits to health accounts. And that’s where discussions should begin.
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HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.