Qualified medical expenses are amounts paid for medical care, not compensated by insurance or otherwise, that a tax-advantaged health account may be spent on tax free. Every account version of the term points back to one underlying definition, so the way to answer a question about any of them is to read that definition first and then read the account’s own narrowing.
The Underlying Definition Is Medical Care
Section 213 supplies the meaning the other provisions borrow, and it is a four-part list. The 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, for transportation primarily for and essential to medical care referred to in subparagraph (A), for qualified long-term care services as defined in section 7702B(c), or for insurance covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract as defined in section 7702B(b) (26 U.S.C. 213(d)(1)).
A trailing sentence caps the fourth category rather than leaving it open. In the case of a qualified long-term care insurance contract, only eligible long-term care premiums, as defined in paragraph (10), shall be taken into account under subparagraph (D) (26 U.S.C. 213(d)(1)).
The first category is wider than the word treatment suggests, because it reaches prevention of disease and it reaches anything paid for the purpose of affecting any structure or function of the body (26 U.S.C. 213(d)(1)).
The Health Savings Account Version
The HSA definition adds three things to the borrowed one: whose expenses count, the insurance rule, and a specific inclusion. The term qualified medical expenses means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care as defined in section 213(d) for such individual, the spouse of such individual, and any dependent of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise, and for purposes of that subparagraph amounts paid for menstrual care products shall be treated as paid for medical care (26 U.S.C. 223(d)(2)(A)).
The compensated-for clause is the one that gets dropped in summaries. A bill the plan later reimburses stops being a qualified medical expense to that extent, whatever it was when it was paid.
Premiums Are Out of an HSA, With Five Exceptions
The rule is flat and the exceptions are a closed list. Subparagraph (A) shall not apply to any payment for insurance (26 U.S.C. 223(d)(2)(B)). That bar shall not apply to any expense for coverage under a health plan during any period of continuation coverage required under any Federal law, a qualified long-term care insurance contract as defined in section 7702B(b), a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law, in the case of an account beneficiary who has attained the age specified in section 1811 of the Social Security Act any health insurance other than a medicare supplemental policy as defined in section 1882 of that Act, or any direct primary care service arrangement (26 U.S.C. 223(d)(2)(C)).
The fourth exception is the one that carries a carve-out inside it, because a Medigap policy is excluded from it by name.
Three Things Section 213 Rules Out
Medicine is only in if it was prescribed. An amount paid during the taxable year for medicine or a drug shall be taken into account under subsection (a) only if such medicine or drug is a prescribed drug or is insulin (26 U.S.C. 213(b)), and a prescribed drug means a drug or biological which requires a prescription of a physician for its use by an individual (26 U.S.C. 213(d)(3)).
Cosmetic surgery is out, with a stated exception. The term medical care does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease (26 U.S.C. 213(d)(9)(A)). The term itself is defined by effect rather than by procedure: cosmetic surgery means any procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease (26 U.S.C. 213(d)(9)(B)).
Lodging is in only on two conditions and only up to a capped amount. Amounts paid for lodging, not lavish or extravagant under the circumstances, while away from home primarily for and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if the care is provided by a physician in a licensed hospital, or in a medical care facility which is related to, or the equivalent of, a licensed hospital, and there is no significant element of personal pleasure, recreation, or vacation in the travel away from home, and the amount taken into account shall not exceed $50 for each night for each individual (26 U.S.C. 213(d)(2)).
The Deduction Version Carries a Floor
Where the same expenses are claimed as an itemized deduction rather than paid from an account, a threshold applies that no account imposes. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent, to the extent that such expenses exceed 7.5 percent of adjusted gross income (26 U.S.C. 213(a)). The figure that threshold runs against is defined in adjusted gross income.
The Same Term Is Narrower in Some Accounts
The phrase does not mean one fixed thing across every account, and the differences are where errors happen. An Archer MSA runs on its own version, which reaches amounts paid for medical care as section 213(d) defines it for the account holder, the holder’s spouse and the holder’s dependents, and only so far as insurance or another source has not compensated them (26 U.S.C. 220(d)(2)), and that account is worked through in Archer MSA. A Medicare Advantage MSA runs on a narrowed form of the same rule, and the narrowing has two limbs. In applying section 220 to a Medicare Advantage MSA, qualified medical expenses shall not include amounts paid for medical care for any individual other than the account holder, and section 220(d)(2)(C) shall not apply (26 U.S.C. 138(c)(1)). That account is worked through in Medicare Advantage MSA. The account family as a whole, and which break each one carries, is in tax-advantaged account.
Common Questions
For the medicine and drug category the statutory test is a prescription. An amount paid for medicine or a drug is taken into account only if it is a prescribed drug or is insulin (26 U.S.C. 213(b)). Menstrual care products are treated as paid for medical care by an express rule for health savings accounts (26 U.S.C. 223(d)(2)(A)), and the products that rule covers are defined as a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital-tract secretions (26 U.S.C. 223(d)(2)(D)).
For a health savings account, the account beneficiary’s own expenses and those of the spouse and any dependent, with dependent defined by reference to section 152 and read without three of its subsections (26 U.S.C. 223(d)(2)(A)). Who is a dependent in the general case is in dependents. Section 213 has its own rule for a child of divorced parents: any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this section (26 U.S.C. 213(d)(5)).
Not in the ordinary case, because the bar in the statute is unqualified before the exceptions are read (26 U.S.C. 223(d)(2)(B)). Continuation coverage, a qualified long-term care insurance contract, coverage during a period of unemployment compensation, most coverage after the account beneficiary reaches the age specified in section 1811 of the Social Security Act, and a direct primary care service arrangement are the listed exceptions (26 U.S.C. 223(d)(2)(C)).
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