IRS Reminder: Not All Health Expenses Qualify for Deductions

IRS Reminder: Not All Health Expenses Qualify for Deductions

In a recent news release, the Internal Revenue Service (IRS) has reiterated important guidelines regarding the eligibility of health and wellness expenses for deductions and reimbursements under health Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs).

What Qualifies as a Medical Expense? According to the IRS, for an expense to be considered a medical expense under Code § 213, it must be directly related to the diagnosis, cure, mitigation, treatment, or prevention of disease, or must affect the structure or function of the body. This definition excludes expenses that are solely for general health benefits.

The Risk of Nonmedical Reimbursements: The IRS warns that if health FSAs or other account-based health plans reimburse nonmedical expenses, it could result in all plan payments, including those for legitimate medical expenses, being included in participants’ taxable income.

Misleading Claims and the Importance of Diagnosis-Specific Documentation: The IRS has expressed concerns about companies misleading individuals by suggesting that a doctor’s note can transform general food and wellness expenses into medical expenses. However, without a clear connection to a diagnosis-specific treatment or activity, these expenses do not qualify as medical expenses.

Case in Point: The Denied Claim Highlighting the issue, the IRS shared an instance where an individual with diabetes was denied reimbursement for healthy food expenses through his health FSA. Despite obtaining a doctor’s note from a company that advertised such services, the claim was rejected because the food did not meet the criteria for a medical expense.

Guidance for Taxpayers: For those seeking clarity on what constitutes a reimbursable medical expense, the IRS points to its FAQs on nutrition, wellness, and general health expenses. These resources clarify that food or beverages purchased for health reasons, such as weight loss, can only be reimbursed if they do not fulfill normal nutritional needs, are used to alleviate or treat an illness, and are substantiated by a physician’s prescription.

Understanding the fine line between general wellness and medical care is crucial for taxpayers and plan administrators. As the IRS emphasizes, only expenses that meet the stringent criteria set forth in the Code will be considered for deductions and reimbursements, ensuring the integrity of health-related financial plans.

Source: Thomson Reuters

IRS Reminder: Not All Health Expenses Qualify for Deductions

Understanding DCAP Reimbursement Rules: Can You Pay Your Child for After-School Care?

Can Our DCAP Reimburse Expenses for the Care of a Child Who Will Turn 13 Later in the Plan Year?

A participant in our company’s Dependent Care Assistance Program (DCAP) faces a common scenario: hiring an adult son to provide after-school care for their 10-year-old daughter. The burning question: Can the DCAP reimburse payments to the son? Let’s dive into the details.

  1. Eligibility for Reimbursement:
    • Payments to certain relatives or dependents do not qualify for reimbursement under the DCAP requirements.
    • Specifically, a DCAP cannot reimburse payments to an employee’s child who is under age 19 at the end of the year or to someone whom the employee (or the employee’s spouse) could claim as a dependent.
    • Whether the DCAP can reimburse the participant for care provided by the son hinges on the son’s age and whether the participant (or the participant’s spouse) can claim him as a dependent for federal income tax purposes.
  2. Limitations on Reimbursement:
    • DCAPs cannot reimburse payments to an employee’s spouse or to the parent of an under-age-13 qualifying child (e.g., an employee’s former spouse who is also the child’s parent).
    • It’s essential to communicate this information clearly in your DCAP summary or open enrollment materials.
  3. Documentation Requirements:
    • Participants must include specific details when claiming an exclusion for reimbursement of dependent care expenses on their tax returns (using Form 2441).
    • For individual care providers, participants need to provide the name, address, and taxpayer identification number (TIN) (usually the Social Security number).
    • Exempt organizations require only the provider’s name and address.

In summary, while the DCAP can potentially reimburse payments for care provided by the son, it’s crucial to understand the eligibility criteria, limitations, and documentation requirements. Clear communication and accurate reporting are key to ensuring compliance with DCAP rules.

Source: Thomson Reuters

IRS Reminder: Not All Health Expenses Qualify for Deductions

IRS Announces 2024 Standard Mileage Rates and Maximum Vehicle Values

The IRS has announced the optional 2024 standard mileage rates for business, medical, and other uses of an automobile, and the 2024 vehicle values that limit the application of certain rules for valuing an automobile’s use. For 2024, the business standard mileage rate is 67 cents per mile (up from the 65.5-cent rate that applied during 2023). The rate when an automobile is used to obtain medical care—which may be deductible if it is primarily for, and essential to, the medical care—is 21 cents per mile for 2024 (down from the 22-cent rate that was in effect during 2023). The same 21-cent rate will apply for deducting automobile expenses that are moving expenses. For taxable years beginning after 2018 and before 2026, however, the moving expense deduction is available only for certain moves by members of the Armed Forces on active duty (see our article). The 2024 rate for charitable use of an automobile is 14 cents per mile (unchanged from 2023).

Standard mileage rates can be used instead of calculating the actual expenses that are deductible. For example, the business standard mileage rate can be used instead of determining the amount of fixed expenses (e.g., depreciation, lease payments, and license and registration fees) and variable expenses (e.g., gas and oil) that are deductible as business expenses. Only variable expenses are deductible as medical or moving expenses, so the medical and moving rate is lower. Parking fees and tolls related to use of an automobile for medical or moving expense purposes may be deductible as separate items. Fixed costs (e.g., depreciation, lease payments, insurance, and license and registration fees) are not deductible for these purposes and are not reflected in the standard mileage rate for medical care and moving expenses. These and other details about using the standard mileage rate can be found in Revenue Procedure 2019-46.

The Notice also sets the maximum vehicle values that determine whether the cents-per-mile rule or the fleet-average valuation rule are available to value the personal use of an employer-provided vehicle. The cents-per-mile rule determines the value of personal use by multiplying the business standard mileage rate by the number of miles driven for personal purposes. The fleet-average rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule. For vehicles (including vans and trucks) first made available to employees for personal use in calendar year 2024, the maximum vehicle value under both rules will increase to $62,000 (up from $60,800 in 2023). That amount will also be the maximum standard automobile cost for setting reimbursement allowances under a fixed and variable rate (FAVR) plan—an alternative to the business standard mileage rate that bases payments on data derived from the geographic area where an employee generally pays or incurs the costs of driving an automobile in performing services as an employee.

Source: Thomson Reuters

IRS Reminder: Not All Health Expenses Qualify for Deductions

Agency RFI Focuses on No-Cost Coverage of OTC Preventive Products Without a Prescription

A DOL, HHS, and IRS request for information (RFI) is seeking input about how the preventive health services mandate applies to over-the-counter (OTC) preventive items and services, including the potential benefits and costs of requiring plans and insurers to cover these items at no cost without a provider’s prescription. Agency guidance has previously advised that OTC items and services generally must be covered without cost-sharing only when prescribed by a provider.

The RFI seeks information on current access to and utilization of OTC preventive products, as well as operational challenges for plans, insurers, third-party administrators, and pharmacy benefit managers. For instance, the request asks about operational challenges that may be associated with using telepharmacies and mail orders within and across states or localities. The agencies are also interested in “lessons learned” from providing coverage for OTC COVID-19 diagnostic tests during the COVID-19 public health emergency. The RFI explains that the agencies are particularly focused on OTC preventive care items that can be purchased without a prescription now or in the future, such as contraceptives, tobacco-cessation products, folic acid during pregnancy, and breastfeeding supplies.

Click here for the full request.

Source: Thomson Reuters

IRS Reminder: Not All Health Expenses Qualify for Deductions

IRS Modifies Guidance on COVID-19 Expenses for HDHPs, Provides Preventive Care Clarifications

In response to the end of the COVID-19 emergency, the IRS has issued a notice modifying its 2020 guidance regarding the COVID-19 testing and treatment benefits that can be provided by a high-deductible health plan (HDHP). Under the 2020 guidance, HDHPs can provide those benefits without a deductible or with a deductible below the applicable HDHP minimum deductible (self-only or family), thereby allowing individuals to receive coverage under HDHPs that provide such benefits on a no- or low-deductible basis without any adverse effect on HSA eligibility. Agency FAQs issued earlier this year indicated that the 2020 guidance would apply until further guidance was issued. This latest notice provides that, due to the end of the COVID-19 emergency, the relief described in the 2020 guidance is no longer needed and will apply only for plan years ending on or before December 31, 2024.

The notice also addresses the status of certain items and services as preventive care under the Code’s HSA eligibility rules. According to the notice, the preventive care safe harbor under those rules does not include COVID-19 screening (i.e., testing), effective as of the notice’s publication date. The notice acknowledges that the preventive care safe harbor includes screening services for certain infectious diseases but also observes that screenings for “common and episodic illnesses, such as the flu” are not included and concludes that COVID-19 differs from the types of diseases on the list. The notice further provides that—consistent with recent agency FAQs regarding the impact of the trial court’s decision in the Braidwood case—items and services recommended with an “A” or “B” rating by the United States Preventive Services Task Force (USPSTF) on or after March 23, 2010, are treated as preventive care under the HSA eligibility rules, whether or not they must be covered without cost sharing under the preventive services mandate. Thus, if the USPSTF were to recommend COVID-19 testing with an “A” or “B” rating, then that testing would be treated as preventive care under the HSA eligibility rules, regardless of whether coverage without cost-sharing is required under the preventive services mandate.

Source: Thomson Reuters

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IRS Reminder: Not All Health Expenses Qualify for Deductions

IRS Reminder: Not All Health Expenses Qualify for Deductions

In a recent news release, the Internal Revenue Service (IRS) has reiterated important guidelines regarding the eligibility of health and ...

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