IRS Clarifies Rules: Only Medical Expenses Qualify for Tax-Advantaged Accounts

ARTICLE | October 01, 2024

Authored by Vasquez + Company

The IRS has issued a warning to employers regarding the use of tax-advantaged accounts for health care expenses, emphasizing that only qualified medical expenses are eligible for deductions or reimbursements. This article highlights the four main types of accounts—Health FSAs, HSAs, HRAs, and MSAs—and addresses the IRS's concerns over aggressive marketing tactics promoting nonqualified expenses.

Key Points:

• Qualified Expenses: Only expenses related to the diagnosis, cure, mitigation, treatment, or prevention of disease qualify for deductions or reimbursements under tax-advantaged accounts
• Common Account Types: The IRS news release outlines four primary vehicles for managing medical expenses: Health FSAs, HSAs, HRAs, and MSAs, detailing their contribution limits and tax implications.
• Marketing Risks: The IRS warns about misleading claims from certain businesses that suggest nonmedical expenses can be reimbursed with a doctor’s note, highlighting the importance of compliance with Internal Revenue Code Section 213.

Employers sponsoring these accounts should confirm participants understand what qualifies as a medical expense to avoid tax implications.

For more information, read the full article here.

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