October 15, 2009
On July 14, 2009, the Internal Revenue Service (IRS) issued an information letter regarding reimbursement of certain over-the-counter (OTC) items by health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). Specifically, the letter provides guidance on whether these items qualify as "medical care" expenses that may be reimbursed. The IRS notes in the letter that it is intended for informational purposes only and does not constitute a ruling by the IRS.
Medical Care Expenses
In the letter, the IRS explains that medical care expenses are amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. Expenses for OTC items may qualify as medical care only if they are "primarily for" the prevention or alleviation of a physical or mental defect or illness. Expenses that merely benefit general health, on the other hand, are considered to be only personal expenses and will not qualify as medical care expenses.
Medical Care Factors
Whether an otherwise personal expense is primarily for medical care is a question of fact. Several objective factors may be considered in making this determination, including: The motive or purpose for making the expenditure;
Whether a physician has diagnosed a medical condition and recommended the item as treatment;
The link between the treatment and the illness;
Treatment effectiveness; and
The proximity in time to the onset or recurrence of a disease.
The "But For" Test
For the expense to be deemed medical care, it must be established that the expense would not have been paid "but for" the disease or illness. That is, the item is not for medical care if the individual would have paid for it even without a medical condition.
Personal and Medical OTC Items
The IRS letter specifically addresses a number of items that may be both personal and medical in nature, as well as items that are generally used only for medical care.
Personal Items as Medical Care
Certain items may qualify as medical care, or may be personal items, depending on how they are used. For example, a person may use these items to maintain general health, or as toiletries or cosmetics. These are personal uses. However, if it can be shown that the item is used to treat or alleviate a disease or injury, and satisfies the "but for" test, the item may qualify as a medical care expense.
These items include:
Medical Care Only Items
Items that have no purpose other than to treat a disease, illness, or mental or physical defect may qualify as medical care. Treatments for the following conditions will most likely qualify as medical care:
In addition, the following items will probably qualify as medical care:
Support braces and shoe inserts for injured or weakened body parts;
Products that have no purpose but to treat existing skin conditions such as eczema (as opposed to products that are designed to prevent the development of the condition); and
Wheelchair cushions that are a necessary accessory to a wheelchair.
Excess Cost of Personal Items
The excess cost of an otherwise personal item that is specially designed to treat or alleviate a medical condition, over the cost of the item without the special features, may be considered an expense for medical care. For example, the cost of specially designed clothing that is used to treat a specific disease, such as diabetic socks, compression hose or orthopedic shoes, that exceeds regular clothing may be a medical care expense. However, these items may also be used for personal or preventive reasons. Whether they are eligible for reimbursement will depend on the facts of each specific case.
Food and Food Thickeners
The cost of food is not a medical care expense if it is a substitute that a person would normally consume to meet nutritional requirements. However, it is possible that food thickeners may be considered a medical care expense. This is a question of fact that must be determined on a case-by-case basis.
Please contact your A.E. Mourad Agency, Inc. representative with any questions.
A.E. Mourad Agency, Inc.
28277 Dequindre, Madison Heights, MI 48071
Phone: (248) 336-1600
Fax: (248) 336-1607
Web: www.aemourad.com