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IRS Warning: HSAs, Health FSAs and HRAs Cannot Pay for Personal Health and Wellness Expenses

But the Lifestyle Spending Account (LSA) can help.

The IRS recently issued a bulletin to remind taxpayers that tax-advantaged medical savings accounts, such as health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), cannot pay for personal expenses for general health and wellness. Similarly, health savings accounts (HSAs) cannot be used to pay for these personal expenses on a tax-free basis.

The IRS provided this reminder as a warning to taxpayers to beware of companies’ misrepresentation of when personal health expenses can be reimbursed by health FSAs, HRAs and HSAs.

Expenses that are merely beneficial to general health are not qualified medical expenses.

Nutrition, Wellness and General Health Expenses

The IRS maintains a set of FAQs addressing when costs related to nutrition, wellness and general health are qualified medical expenses. These FAQs clarify that these costs are qualified medical expenses only in narrow circumstances. For example:

  • The cost of nutritional counseling or a weight-loss program is a qualified medical expense only if it treats a specific disease diagnosed by a physician (such as obesity or diabetes).
  • The cost of nutritional supplements is a qualified medical expense only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.
  • The cost of weight-loss food or beverages is a qualified medical expense only if the food or beverage does not satisfy normal nutritional needs, the food or beverage alleviates or treats an illness, and 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 that of a product that satisfies normal nutritional needs.
  • The cost of exercise for the improvement of general health, such as swimming or dance lessons, is never a qualified medical expense (even if recommended by a doctor).

As an employer, what can you do?

Have you heard of Lifestyle Spending Accounts (LSAs)? An LSA is an employer-funded account that can cover some health- and wellness-related expenses outside your health plan. This benefit can help your employees to focus on well-being and save money on the activities or expenses that matter to them.

a woman sitting on a tableWhat Is an LSA?
An LSA is a taxable, employer-funded benefit to support your employees’ physical, mental, emotional and financial health and wellness. Employers determine their annual contribution amount and how employees can spend their LSA funds. You can also place parameters on acceptable products, services and expenses—covering non-medical expenses relating to physical, mental and financial wellness.
How Does It Work?
Employers deposit money into employees LSA to pay for eligible products and services that support their lifestyle. The money employees spend is taxable income, so they should see the benefit itemized on their payroll stub with applicable employee taxes withheld.

What Types of Expenses Are Covered?
Depending on how the LSA is set-up, employees have multiple options for spending their funds. Common LSA expenses include:
  • Convenience services (e.g., home meal delivery, food or grocery delivery, and home cleaning services)
  • Emotional services (e.g., nonmedical counseling services, retreats and personal development classes)
  • Financial services (e.g., financial planning, tax preparation and filing fees, home purchase expenses, identity theft services and financial education programs)
  • Legal services (e.g., will fees and estate advisor and planning services)
  • Lifestyle expenses (e.g., social activity fees)
  • Mental health (e.g., mindfulness or meditation apps and life coaching)
  • Pet services (e.g., adoption fees, pet insurance, pet supplies, pet grooming and pet day care)
  • Physical health (e.g., gym or spa memberships, fitness classes, personal trainer services, fitness trackers, weight management program fees, nutrition counseling, athletic apparel and exercise equipment)
  • Professional development (e.g., continuing education courses, certificates and industry conferences)
  • Return-to-work incentives (e.g., gas, meals and auto maintenance)
  • Wellness (e.g., food supplements and nutrition counseling)
  • Work uniforms or equipment
  • Work-from-home expenses (e.g., internet bill, home office equipment and office supplies)

Learn more about Life Style Spending accounts here.

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