Is It Qualified for Tax-free Reimbursement? Let's Look at Some Items in the Gray Area.

Whether an expense is qualified for tax-free distribution from a Health Savings Account can be confusing. Let's wade into the gray area.

What is a qualified medical expense? It's an expense related to medical care. And what is medical care? The definition is contained in Section 213(d) of the Internal Revenue Code. It's not a list, but rather a description of services that meet the test.

In the Internal Revenue Service's works, "[T]he term “medical care” means 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. [D]eductions for medical care expenses under section 213 are limited to expenses “incurred primarily for the prevention or alleviation 2 of a physical or mental defect or illness” and do not include deductions for expenses that are merely beneficial to an individual’s general health.

IRS doesn't maintain a list of HSA-qualified expenses. With rare exception, the list of products and services that an account owner can reimburse tax-free is defined by Section 213(d). That list applies to the medical deduction and tax-advantaged medical accounts (Health Savings Accounts, Health FSAs, and Health Reimbursement Arrangements). This basic fact is often lost on members of Congress, who propose legislation to expand or contract (think termination of pregnancy) the list of HSA-qualified expenses with legislation that targets Health Savings Accounts specifically, rather than the federal tax code.

What is clear is that items that promote general health - think a multivitamin, a bicycle, or a gym membership - are not qualified expenses. Sometimes, however, the same item is qualified for one taxpayer and is not qualified for another, depending on individual circumstances.

Let's look at some of the expenses that fall in or around the gray area of tax-free reimbursement from a tax-advantaged health account.

Can I reimburse my pet's medical expenses, including prescriptions, tax-free from my Health Savings Account?

Sorry to break the news. Your qualified family members include you, your spouse, and your tax dependents. You may argue to the IRS that Fido or Whiskers is a ne'er-do-well layabout incapable of getting on his four legs and finding a job (no, discoloring the lawn and offering gifts of mice and moles is not considered gainful employment - nor does it pay particularly well). But your argument is likely to fall on deaf ears.

You can purchase pet insurance to cover your pet's medical expenses. The bad news is that pet insurance companies don't offer HSA-qualified plans that would allow King or Fluffy (or a human proxy) to open and fund a Health Savings Account in the pet's name. The good news is that your pet's medical coverage won't disqualify you and other family members from funding Health Savings Accounts.

Can I reimburse condoms from my Health FSA?

Seriously, bro? You make the argument that they're preventive - they're obviously preventing something! - but do you really think you can buy them with tax-free dollars?

Actually, you can. The IRS issued guidance in late 2024 that adds condoms to the list of qualified medical expenses under Section 203(d). A wide investment now has a lower net cost.

Can I reimburse a hot tub with a tax-free distribution from my Health Savings Account?

As a general rule, no. A hot tub is relaxing, and its warm water and jets soothe aching muscles, which helps you recover from the condition called life. But don't expect the tax man to buy this argument in the heat of an audit.

The exception is if you are diagnosed with an injury, illness, or condition for which the benefits of a hot tub are an appropriate treatment. You must secure a prescription or Letter of Medical Necessity from a licensed medical prescriber and file it with your tax documents. The prescription or LMN is not a get-out-of-jail-free card, because an IRS auditor may not agree on the appropriateness of the treatment.

Tread carefully if you want to pursue this purchase. The temperature in the audit room may feel warmer than the 102 degree water in the tub.

Can I buy my weed with tax-free Health Savings Account dollars, man?

Marijuana falls under Schedule 1, the most dangerous class of drugs in the federal government's eyes. You cannot reimburse your dubbies, edibles or creams tax-free from your Health Savings Account. It doesn't matter whether you have a valid prescription, or whether your state has legalized or decriminalized medical or recreational use of marijuana.

Sorry, dude, you'll have to use after-tax dollars to restock your blunt humidor.

Can I buy my special food tax-free through my Health Savings Account?

Define special food. Are you referring to low-protein food or gluten-free bread because you have an underlying medical condition that makes eating off-the-shelf food painful or life-threatening? Then yes, you can reimburse, but only the difference between the price of a similar mainstream product and your medically necessary special food.

What about healthy food - organic veggies, protein shakes, grass-fed beef, free-range eggs, and line-caught salmon? The short answer is no. Or at least most people, including tax auditors, would say no. Some companies prescribe healthy food, which consumers assume is a ticket to purchasing these healthy foods with Health Savings Account funds. This is a treacherous path to follow. And even when you go out on that limb, you can reimburse tax-free only the difference between the cost of your food and comparable processed foods.

I heard an interesting argument recently. A taxpayer who ate no vegetables was diagnosed with a vitamin deficiency. She purchased nutritious shakes with funds from her Health Savings Account. Her argument was that this food was medically necessary to treat a vitamin deficiency that she could not address with her current diet. How would you rule if the case came to tax court and you were the judge? I suspect she'd be casting my image in a voodoo doll.

Can I pay for home repairs tax-free from my HSA?

It depends on the home repairs. Don't try to tell the IRS that you had to remodel your kitchen to prepare special foods for a gluten-free or lactose-intolerant family member. That won't fly.

If you must accommodate a disabled family member, the repairs are a qualified expense. Need to replace your door with a wider one or replace the front steps with a ramp to accommodate a family member's wheelchair? That's OK. Need to add railings on all walls or add a stair lift to help a family member with stroke damage navigate the home on her own? That, too, is a qualified expense.

But here's the caveat: You can reimburse only the portion of the expense that does not increase the value of your home. For example, if you replace an old narrow wooden door with a wider, insulated steel door, you can reimburse the total cost of the project less the price of a replacement wooden door. If you must expand the width of your garage to accommodate a lift on a handicap van, that project boosts the value of your home by increasing the size of the garage - whether you use the space to accommodate a handicapped relative or the next buyers use it to store an all-terrain vehicle or cultivate an indoor marijuana farm. You may or may not be able to reimburse any of the cost of that project.

These situations are sometimes tricky because it's not always easy to determine which projects increase the property value and by how much. In the Health FSA world, with third-party substantiation, determining how much of the project can be reimbursed tax-free can be problematic. Health Savings Accounts are different in that they rely on self-substantiation. Account owners don't have to face third-party rejection, but they go into a tax audit not knowing how a withdrawal will be viewed.

The Bottom Line

Health Savings Accounts provide more flexibility than other tax-advantaged health accounts, plus the opportunity to avoid third-party substantiation that may thwart some of your more creative definitions of a qualified medical expense. But the same definition of medical care applies to reimbursements from a Health Savings Account. When you move into the gray area, you live in limbo until the deadline has passed to audit your personal income tax return, or you successfully defend a gray-area deduction during an audit.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.