Utilize Tax-Advantaged Health Flexible Spending Accounts and Health Savings Accounts

The new calendar year provides many employees with the opportunity to begin utilizing their tax-advantaged health flexible spending accounts (FSA) and health savings accounts (HSA) administered through their employers’ benefit plans. Health FSAs and HSAs are attractive and useful because they are generally funded with an employee’s pre-tax earnings.

The Internal Revenue Service (IRS) issued a news release (IRS alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs | Internal Revenue Service) earlier this month to remind taxpayers that personal expenses for general health and wellness cannot be deducted or reimbursed under these arrangements because they are not qualified expenses under the Internal Revenue Code. The IRS released its statement amid concern that “some companies are misrepresenting the circumstances under which food and wellness expenses can be paid or reimbursed under FSAs and other health spending plans.”

Common examples of non-qualified expenses include gym memberships obtained for general health reasons, and the cost of therapies (including nutritional counseling) that are not related to a specific illness or disease (as substantiated by a medical professional). More information can be found on the IRS’s website: Frequently asked questions about medical expenses related to nutrition, wellness, and general health | Internal Revenue Service (irs.gov)

In light of increased IRS scrutiny, participants should be well-informed, and exercise caution when submitting an expense for reimbursement. If health FSAs or HSAs pay or reimburse a participant for nonmedical (i.e., personal) expenses, then the participant risks having to include all payments from the plan, including those for actual medical expenses, in their income.

Thank you to Adam Margulies for this week’s Tax Tracker!