B-1. Introduction. Let’s go back to the basics and build from there.  Section 213(d)(1) of the Code defines “medical care” to mean amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”  (Emphasis added).  Thus, there are two separate prongs to the definition of medical care:  (1) whether the care is for the prevention or treatment of disease or (2) whether the care affects the structure or function of the body.

Some of you may be looking at the second prong and thinking, hey, maybe I can use my HSA to pay for that nose job (or something along those lines).  But Section 213(d)(9)(A) provides:

The term “medical care” does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease [i.e., breast cancer[1]].

We hate to be the ones to break it to you.

B-2. Medical expenses for diagnostic services.  IRS Revenue Ruling 2007-72 addressed the deductibility of diagnostic services in the following factual scenarios where taxpayers were not experiencing any symptoms of illness.

Situation 1

Taxpayer A undergoes an annual physical examination, which is performed by a physician. A pays for the physician’s services and laboratory tests.

Situation 2

Taxpayer B pays for a full-body electronic scan, a relatively high-cost procedure, performed by a technician at a clinic. The scan examines the condition of B‘s internal organs and may identify disease or other abnormalities. B has not consulted a physician before undergoing the procedure, which can be obtained without a physician’s direction, or determined if less expensive alternatives are available.

Situation 3

Taxpayer C buys a test kit and uses it to determine whether she is pregnant.

In all three cases, the IRS concluded that the expenses were eligible medical expenses under 213(d) of the Code.  It also provided the following definition of diagnosis:

“Diagnosis” is the determination of a medical condition, such as a disease, by physical examination or study of symptoms. Black’s Law Dictionary (8th ed., 2004). A diagnosis may encompass a determination that disease is absent. The determination of a medical condition may include testing for changes in the functions of the body, such as those resulting from pregnancy, that are unrelated to disease.

When this ruling was issued, we confirmed in a telephone call with Dan Cassano, the IRS official who drafted the ruling, that the impact of the ruling is that diagnostic procedures may be deductible even in the absence of disease.[2]

In a recent Private Letter Ruling, the IRS allowed an individual to be reimbursed from their health FSA for a portion of the expense of obtaining genetic testing services from “23 and Me” that relate to health services such as genotyping.^[3]  A large number of diagnostic services are available online or through local laboratories and clinics that do diagnostic testing ranging from coronary calcium scans (done to check for calcium in the arteries that supply the heart) to blood tests for every ailment you can think of.  All of these should qualify for reimbursement from medical savings accounts under the standard above. 

Although we don’t practice DWI law, Minnesota requires certain offenders to use ignition interlock to regain driving privileges.  Users must provide a breath sample into the interlock for the vehicle to start.  The participant is responsible for all costs associated with participation in the ignition interlock device program.  As lawyers, it’s fun to think about whether the cost is an eligible medical expense as the determination of a medical condition (intoxication).  It certainly would be in an emergency room.  But the cost of in-car cameras to make sure it is you and not your dog breathing into the device is probably not an eligible medical expense. If we were DWI lawyers, we would probably tell our clients to open HSAs before their hearing (assuming they had HDHPs).

B-3. Preventive care.

Section 213(d) defines medical care expenses to include those “incurred primarily for the prevention. . . of a physical or mental defect or illness.”  For amounts paid to be treated as “preventive” medical care, there must be an existing disease or an “imminent probability of incurring a disease.”[4]

Use of the phrase “imminent probability of incurring a disease” dates back to a U.S. Tax Court case from the 1960s.  In Daniels v. Comm’r of Internal Revenue,[5] the Tax Court disallowed a deduction as medical expenses for of the cost of building a fallout shelter.  (We love this stuff, it’s so ridiculous).  While acknowledging the dangers of radiation sickness in the event of a nuclear attack, the Court noted that “Petitioners have introduced no plausible evidence tending to show the imminent probability of increased radiation in the Worcester area at or before the time the shelter was constructed.”[6] 

In Revenue Ruling 99-28, the IRS took the position that the cost of smoking cessation classes was deductible as preventive care under 213(d).  According to the IRS,

“[R]eports of the Surgeon General have concluded, based on numerous studies, that a strong causal link exists between smoking and several diseases. See, e.g., Tobacco Use Among U.S. Racial/Ethnic Minority Groups (1998); Preventing Tobacco Use Among Young People (1994); The Health Benefits of Smoking Cessation (1990).”[7]

Because diseases related to smoking often take years to manifest, the requirement of an imminent probability appears more weighted towards a strong causal link than proximity in time. 

Within the medical account administration industry, there is broad acceptance that lip balm and sunscreen with a sun protection factor (SPF) of at least 15 is a reimbursable medical expense as preventive care.[8]  Sunscreen is not included in the list of reimbursable medical expenses in IRS Publication 502, but an IRS official has informally commented that sunscreen will likely qualify as medical care where its purpose is to prevent sunburn.[9]  Even more informally than that (and this is second-hand), an IRS official has stated that they question whether sunscreen is a medical expense, but they’re not about to take the reimbursement of sunscreen away from 70 million people.  Some (but not all) third party administrators treat sunscreen as a “dual purpose” and currently require a doctor’s note to reimburse sunscreen because it may be used for general health (i.e., preventing age spots and wrinkles) as well as for preventing sunburn. 

B-4. Structure and Function of the Body.

Section 213(d)(1) of the Code defines “medical care” to mean amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”  Emphasis added.  In Dickie v. Commissioner, the United States Tax Court noted that,

The deductibility of medical care payments under section 213 is not strictly limited to traditional medical procedures, but it includes payments made for the purpose of affecting any structure or function of the body.^[10]

As noted in Magdalin v. IRS,

Where a medical procedure affects a structure or function of the taxpayer’s body, the cost of such a procedure may be a deductible medical expense unless proscribed by Sec. 213(d)(9) [prohibiting the reimbursement of cosmetic surgery]. . . A vasectomy is an example of a non-cosmetic operation that the Commissioner has determined is deductible because it affects the structure of a taxpayer’s body.^[11]

The “structure and function” cases deal primarily with surgical interventions however small and ensures treatment as a medical expense regardless of whether it is for the diagnosis, cure, mitigation, treatment, or prevention of disease.^[12]  In The Hitchhiker’s Guide to the Galaxy by Douglas Adams, Zaphod Beeblebrox had a third arm surgically grafted to his chest for ski boxing.  Cosmetic?  It probably didn’t make him look better, so no.  Zaphod would likely be able to cover the cost of this procedure through a medical savings account. 

B-5. Edge Cases.

The IRS Frequently Asked Questions from 2023 included questions and answers related to food and supplements:

Q12: Is the cost of food or beverages purchased for weight loss or other health reasons a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? (added March 17, 2023)

A12: Yes, but only if (1) the food or beverage doesn’t satisfy normal nutritional needs, (2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal nutritional needs. If any of the three requirements is not met, the cost of food or beverages is not a medical expense.

That’s a lot of hoops to jump through, and we’re not entirely sure what they mean when they state that the food or beverage may not satisfy normal nutritional needs.  Does it have to, for example, satisfy the nutritional needs of a horse?  We think they are probably talking about gluten-free diets, liquid diets, and other specialty diets that may be ordered by a physician, and intending to exclude “eat less” diets delivered to your door which are comprised of smaller portions of ordinary food.  We also wonder about the last test:  the reimbursable medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal nutritional needs.  Are they talking about dinner at McDonald’s or Manny’s Steakhouse in Minneapolis?  They may be talking about the difference in cost between, for example, gluten-free cupcakes and regular cupcakes, but even this requirement seems difficult to meet.  Does it make a difference whether you shop at Byerly’s or Cub Foods? 

The guidance covers other topics that seem fairly self-apparent (a doctor’s exam is a medical expense, therapy is covered for a diagnosed mental illness but not for marriage counseling, duh).  We think it’s worth noting the guidance on supplements: 

Q14: Is the cost of nutritional supplements a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? (added March 17, 2023)

A14: Yes, but only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a medical expense.

The phrase “recommended by a medical practitioner” suggests that you would need a letter of medical necessity before a third party administrator would authorize reimbursement.  But here’s where we begin the slippery slide. 

After loosening the purse strings in the 2003 Frequently Asked Questions, the IRS came back in 2024 with the following news release:  “IRS alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs.”[13]  This is a news release rather than official guidance, so it is nonbinding, but it warns and reminds taxpayers and third party administrators that personal expenses for general health and wellness are not considered medical expenses under Section 213(d), and may not be reimbursed from medical savings accounts. 

The Alert focusses on companies hawking food, supplements, and exercise equipment that is labeled “FSA eligible.”  In fact there may be some cases where a doctor would recommend such products in connection with a diagnosed disease, and a third party administrator would approve reimbursement with a “letter of medical necessity” from the physician.  But some of these companies team up with online doctors to generate form letters of medical necessity.  For an extra fee, the buyer will typically fill out an online questionnaire related to their health and/or have a 5 minute call with a doctor who will send them a letter of medical necessity intended to be submitted to their plan administrator along with their receipt for the item.[14]  Whether this is a legitimate approach is debatable based on the product or service and facts and circumstances specific to the individual, but the IRS hits this business practice with a broad brush: 

Some companies mistakenly claim that notes from doctors based merely on self-reported health information can convert non-medical food, wellness and exercise expenses into medical expenses, but this documentation actually doesn’t. Such a note would not establish that an otherwise personal expense satisfies the requirement that it be related to a targeted diagnosis-specific activity or treatment; these types of personal expenses do not qualify as medical expenses.

The “Alert” goes on to remind plan administrators that if they reimburse expenses that are not medical expenses, the plan as a whole will lose it’s “qualified” status and all benefits will be taxable to all participants.  HSA accountholders don’t have third party administrators to substantiate whether their claims are eligible medical expenses, and if the IRS disputes certain reimbursements in an audit, they will be subject to both income taxes and a 20% penalty.  But the HSA will not be disqualified, and valid expense reimbursements will continue to be tax-free. 

The definition of medical care also changes on the margins through decisions of the US Tax Courts, and with the evolution of IRS positions due to advancements in medical science and technology and even changes in societal norms (abortion didn’t use to be an eligible medical expense). 

B-6. Using Smart Cards with Medical Savings Accounts.

A private nonprofit organization plays a leading role in the medical savings account industry.  The Special Interest Group for IIAS Standards (“SIGIS”) maintains an extensive, and very detailed, list of items that may be paid for using specially coded debit cards.  The list and related card technology are licensed to member merchants, card networks, and third party administrators.  A committee comprised of SIGIS members meets regularly to add, and sometimes remove, items from the list. 

If you swipe a card with the SIGIS technology for a health FSA, HRA or VEBA-HRA, and it lets you pay for the item, one of two things are happening in the background.  SIGIS uses the Inventory Information Approval System (IIAS) to match items at the point of purchase with their Eligible Products List.  If there’s a match, the item is considered to be “auto substantiated.”  This basically means that a human being doesn’t have to review a receipt.  But SIGIS also has members who are merchants that qualify under the “90%” rule.  These are limited to pharmacies for which sales are primarily eligible medical items (90% or more of sales for each store registered must be from prescriptions or eligible health medical items).  If your purchase goes through because you bought something from a merchant that relies on the 90% rule, you will be asked to submit a receipt for the item after the fact.  Employees must retain all receipts when they use these cards because most will not be aware which merchants use IIAS and which rely on the 90% rule. 

Your employees also have to remember that claims are only substantiated by third parties if they are incurred under employee benefits plans such as health FSAs, HRAs, or VEBA-HRAs.  Once a claim is substantiated by a third party administrator, they don’t need to retain receipts indefinitely.  

But HSAs are not employee benefit plans; they are individual accounts owned by the employee.  If a custodian offers a smart card of some sort, that reduces the risk to individuals because it’s more likely that the item qualifies as a medical expense.  In an audit, however, the IRS will not have access to card transaction data, and they will want to see each individual receipt to support withdrawals from an HSA.   

Many if not most HSA custodians that offer cards that do not use the SIGIS technology.  Their cards typically allow purchases to go through for merchants and medical care providers with health-care related merchant category codes (MCC).  Your HSA card won’t work at the local VFW, but it may work in drugstores that sell a wide variety of merchandise in addition to prescription and over-the-counter drugs.  For purchases from merchants, you will need your receipts if you are audited to prove that expenses you paid for with the card are eligible medical expenses.  For payments to medical care providers, you will need your Explanations of Benefits (EOBs) which provide information on how much you owe to the provider. 

To be ready for an audit, employees must keep receipts for medical expenses for as long as your tax return is considered open (generally three years after you file).  But in an HSA, you don’t have to reimburse yourself immediately for medical expenses you pay in other ways (such as with cash, checks, or non-medical credit or debit cards). If you pay these expenses with after-tax dollars today, and maintain receipts, you can reimburse yourself from your HSA any time in the future, including in retirement.  (To be eligible for reimbursement, the HSA must have been opened before you incur the medical expense). 

Certain “dual use” items, which may be used for medical or non-medical purposes, generally require a doctor’s letter of medical necessity to be eligible for reimbursement.  If the medical expense isn’t covered by a card attached to your HSA, you can still withdraw cash from the HSA to cover the expense.  So long as you maintain good records and, if necessary, a doctor’s note of medical necessity (or a prescription), it shouldn’t be challenged by the IRS in an audit.

B-7. Practical Tips for Identifying Medical Expenses.

If you are covered by an FSA, HRA, or VEBA, or maintain an HSA, you are typically issued a “smart card” that can only be used for medical expenses.  You can use the card to pay doctors’ bills and purchase medication.  You can also use the smart card to purchase items like crutches, bandages, and diagnostic devices such as blood sugar test kits. 

But just because a purchase is authorized by a smart card, it doesn’t automatically mean that you have used your account or HSA to reimburse an eligible medical expense.  If you use a card attached to your HSA to pay a dental bill, for example, it won’t know whether you had a cavity filled or your teeth whitened (that would be cosmetic care, which is not an eligible medical expense).  If you use a card attached to your VEBA to purchase items from a drugstore subject to the “90% rule” (discussed above in paragraph 4), it won’t know if you purchased eligible over-the-counter drugs or motor oil.  While smart cards reduce your choices and help keep you on the straight and narrow, they can still be used to purchase ineligible items under certain facts and circumstances. 

Health FSAs, HRAs, and VEBA-HRAs require substantiation of medical expenses by the plan administrator.  TPAs will request receipts when necessary and deny reimbursement if the receipt is not an eligible medical expense.  Your employees don’t have to understand the vagaries of Section 213(d) to participate in one of these accounts; the job is outsourced to experts.

HSAs are another matter.  Individual accountholders must know what medical expenses are eligible for reimbursement.  Many HSA custodians only limit card use to medical merchant category codes (MCCs), allowing the purchase of items that do not qualify from drug stores.  And unlike HRAs or FSAs, every HSA accountholder has the right to pull cash from their HSA (subject to income taxes and a 20% penalty if not used for medical expenses).  This feature is important if individuals want to obtain reimbursement for less common medical expenses (i.e., capital expenditures such as exit and entrance ramps to their home to accommodate a disability, which are subject to their own set of rules under 213(d)).  If they have a doctor’s note of medical necessity, they may also need to withdraw cash to reimbursement themselves for “dual use” items or services (which may have both a personal and a medical purpose) that are purchased from merchants without a medical MCC.  But they have to be wary of scams, especially online, involving items improperly labeled as FSA, HRA or HSA-eligible. 

We think most claims that they incur for medical expenses will be no-brainers:  prescription drugs, over-the-counter drugs, deductibles, copays, and coinsurance.  But mistakes will be made. HSA accountholders don’t have their claims substantiated by third parties, and they are at risk of being second-guessed by the IRS in an audit. 

B-8. AI Tool for Medical Expenses.  If you or your employees need help determining whether a claim is a medical expense, we recommend that you start with reviewing IRS Publication 502 (2023) available here.  It’s a laundry list of medical expenses, and while it certainly doesn’t cover everything, it’s a good start for understanding the type and scope of expenses that may be reimbursed from medical savings accounts.  We would also recommend reviewing the Frequently Asked Questions about medical expenses related to nutrition, wellness, and general health (March 17, 2023), available here.  Finally, you can also ask our artificial intelligence tool below to help sort out these issues.  It will not only tell you why something may or may not be a medical expense, but it will give some background on that conclusion for your records.  Though we train our AI tools on applicable guidance and provide other instructions, you should not rely on AI to determine tax or legal issues conclusively. 

[1] Rev. Rul. 2003-57.

[2]  See also Private Letter Ruling 200140017, which includes an extensive list of tests that were held to be deductible medical expenses under 213(d) when paid for by an individual from a health flexible spending account.  It was not a complete list at the time (2001), and by now we think the list would be much longer.  

[3] IRS PLR 132576 (May 16, 2019) (the portion of the expense related to ancestry services was not reimbursable).

[4]  IRS Information Letter, 2000-0405 (December 29, 2000).

[5] 41 T.C. 324 (U.S.T.C. 1963).

[6]  Daniels v. Comm’r of Internal Revenue, 41 T.C. 324 at 328 (U.S.T.C. 1963).

[7] Rev. Rul. 99-28, 1999-1 C.B. 1269.

[8] For example, Cigna, WageWorks, Optum Bank and Alerus, all nationwide administrators of HSA, HRAs and FSA, reimburse expenses incurred for over-the-counter sunscreen products subject to different conditions (for example, Alerus requires a doctor’s note; Cigna does not) 

[9] Informal, nonbinding remarks of Donna Crisalli, IRS, Office of Chief Counsel, Aug. 17, 2012 ECFC Annual Symposium, Mar. 30, 2012 ECFC Annual Conference, and Aug. 12, 2011 ECFC Annual Symposium. 

[10] T.C.M.. 1999-138.

[11] T.C.M. 2008-293

[12] See, e.g., Morrissey v. United States, No. 17-10685 (11th Cir. 2017)

[13] IR-News Rel. 2024-65 (March 6, 2024) available here.

[14] This is a huge and growing business, not just for medical accounts, but for prescriptions of a variety of drugs.  Want metformin, a diabetes drug that studies have linked to longevity?  You can get it online from longevity drug vendors that contract with physicians to issue off-label prescriptions.  Too embarrassed to buy Viagra from the small town drugstore run by your mother-in-law?  You can get that online too. 

Let’s go back to the basics and build from there.  Section 213(d)(1) of the Code defines “medical care” to mean amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”  (Emphasis added).  Thus, there are two separate prongs to the definition of medical care:  (1) whether the care is for the prevention or treatment of disease or (2) whether the care affects the structure or function of the body.

Some of you may be looking at the second prong and thinking, hey, maybe I can use my HSA to pay for that nose job (or something along those lines).  But Section 213(d)(9)(A) provides:

The term “medical care” does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease [i.e., breast cancer[1]].

We hate to be the ones to break it to you.

[1] Rev. Rul. 2003-57.

If you or your employees need help determining whether a claim is a medical expense, we recommend that you start with reviewing IRS Publication 502 (2023) available here.  It’s a laundry list of medical expenses, and while it certainly doesn’t cover everything, it’s a good start for understanding the type and scope of expenses that may be reimbursed from medical savings accounts.  We would also recommend reviewing the Frequently Asked Questions about medical expenses related to nutrition, wellness, and general health (March 17, 2023), available here.  Finally, you can also ask our artificial intelligence tool below to help sort out these issues.  It will not only tell you why something may or may not be a medical expense, but it will give some background on that conclusion for your records.  Though we train our AI tools on applicable guidance and provide other instructions, you should not rely on AI to determine tax or legal issues conclusively.