Health Savings Account (HSA) or Flexible Spending Account (FSA) funds that are used to pay for "qualified" medical expenses are not taxed. Qualified medical expenses are approved medical, dental, and vision fees and services.
Expenses a Health Reimbursement Account (HRA) can reimburse are limited to qualified medical expenses; however, an employer may choose to be more restrictive on what the plan will reimburse.
It's a surprisingly broad list, defined by the IRS in Publication 502 (beginning on page 5). These are just some examples:
|Abortion||Breast Pump & Supplies||Disabled Dependent Care||Lodging & Meals|
|Acupuncture||Capital Expenses (like door ramps)||Drug Addition||Medical Conferences|
|Alcoholism||Car (special design or transportation)||Eye Exam||Nursing Home/Services|
|Artificial Teeth||COBRA premiums or health coverage while receiving unemployment||Eye Surgery||Psychologist|
|Bandages||Contact Lenses||Fertility Enhancement||Psychiatric Care|
|Birth Control Pills||Dental Treatment||Hearing Aids||Special Education|
|Body Scan||Diagnostic Devices||Hospital Services||Vasectomy|
* Insulin is the only drug that is eligible without a prescription. Over the counter (OTC) medications are only eligible if you have a prescription.
For HSAs: Any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate plus 20% tax penalty if you’re under 65.
From IRS Publication 502:
Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
Resources and references:
Last updated 03/02/18