Meeting the “But For” Requirement of Dual-Purpose Expenses

August 24, 2023

Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) are designed to reimburse medical care expenses. While that is a broad category, let’s take a closer look as to what is covered.

Internal Revenue Code, Section 213(d) provides a definition of medical care that includes payment associated with the “diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure of function of the body”.

Not surprising, this definition has been the subject to numerous debates between taxpayers and the IRS over the years. Numerous court cases have attempted to determine whether expenses were medical (and thus could receive tax-advantaged treatment) or instead were personal and therefore did not merit any tax benefit.

Ultimately the key aspect of determining if an expense is medical or personal is in the application of what the courts describe as the “but for” test. The question behind this test is “would the expense have been incurred but for the illness?” In order for the expense to be considered medical, the answer requires that the expense be only for the treatment of a disease, and that absent the disease there would have been no expenditure made for the particular item.

There are numerous expenses that need to be viewed in light of this test, because there are many items that could be used either for specific medical reasons or simply for the benefit of a person’s general health. These types of expenses are considered ”dual-purpose,” and the IRS has indicated that dual-purpose expenses will require more analysis and substantiation than in a case where an expense could only be incurred for a medical reason.

Regarding FSA and HRA claims, this generally means that an individual making a claim for reimbursement for a dual-purpose item will also have to submit a letter of medical necessity to support their expense in order to receive the reimbursement. A letter of medical necessity is essentially a doctor’s confirmation of their diagnosis and course of treatment for an individual, which will support the stance that the item is purely medical and is not a personal expense.

A few examples of expenses that are generally considered dual-purpose and will require a letter of medical necessity to be reimbursed are as follows:

• Special foods: For special foods to meet the “but for” test they need to be taken solely for the alleviation or treatment of an illness, rather than to meet nutritional needs. Additionally, to any extent that the special food can satisfy normal nutritional needs, that amount will not be considered to be for medical care, meaning ONLY the additional expenses associated with the special food above and beyond the amount that a normal food would cost will be reimbursable.

• Retin-A: While Retin-A is frequently used in the treatment of acne, it can also be used for cosmetic purposes because it can help to reduce wrinkles. As a result, Retin-A will require a statement from a physician that it is being utilized for the treatment of acne.

• Vitamins: Numerous cases have found that vitamins will not be considered a medical expense because they are usually taken simply to benefit overall general health. In order to qualify, the vitamin must be prescribed for a particular treatment by a physician and cannot be merely “self-prescribed” by the individual.

• Baby formula: Regular baby formula is not considered a medical expense because it is meeting a nutritional need. However, if a baby requires special formula, a letter of medical necessity can be supplied to reimburse for the additional cost of a special formula that exceeds the cost of normal formula.

• Botox: Botox is a product that is frequently used for the smoothing of wrinkles, and when used for that purpose it is considered purely cosmetic and therefore not reimbursable. However, it can also be used to treat medical conditions like migraines or neck spasms, so may be reimbursed with a letter of medical necessity.

• Fitness trackers: While fitness tracking devices are generally seen as just being beneficial to general health, they can be reimbursable with a letter of medical necessity when prescribed by a doctor for a particular treatment, such as obesity.