Sometimes, Proximity Matters. A Lot.

By William G. Stuart | Originally posted for MaxHSA on LinkedIn

Proximity, or the location of something relative to something else, is a key concept in Health Savings Account compliance.

Proximity is not a topic often discussed in medical reimbursement and coverage, unless it refers to the location of one body part relative to another. Proximity, however, has taken on a new application more recently due to a technology change and a new statute. The Internal Revenue Service has never issued definitive guidance on the proximity issues described below. Yet we can apply common sense and extrapolate from some informal IRS comments to project how the IRS is likely to view the proximity issues below.

Proximity to a Medical Event, Provider, and Diagnosis

Certain dual-purpose services and products require a Letter of Medical Necessity, or LMN, to be purchased with a tax-free distribution from a Health Savings Account (or a Health FSA or Health Reimbursement Arrangement, or HRA). A dual-purpose item is one that has both a medical and non-medical use. For example, a gym membership or trainer fee can be used to maintain general health or prepare for a competitive athletic event (not qualified), or to cure, mitigate, or treat an injury, illness, or condition (qualified for tax-free reimbursement). Other examples include massages and certain vitamins.

An LMN is a note from a medical practitioner identifying the condition being treated and making the case that the item is an appropriate treatment. It must be signed by a valid prescriber and identify the patient, indicate the diagnosis, and explain why the prescribed item is an appropriate treatment. In many cases, the last point is obvious (reimbursing a walking boot for a severely sprained ankle). In other cases, the path is far less clear (reimbursing home exercise equipment to manage depression).

More recently, the definition of a qualified expense has been expandeded by companies that write LMNs for services that traditionally have fallen on the outside of the gray area - items like organic foods, saunas, cold plunges, home exercise equipment and subscriptions, and gym memberships to maintain or improve general health.