Replying in general to everyone:
I think the issue is with the definition of "incurred." To my way of thinking, an expense is incurred when the procedure is performed. Therefore, if the procedure is performed in 2024 but the provider is not paid until 2025, the expense is "incurred" in 2024 but not deductible until 2025 when it is actually paid, per 1.213-1(a)(1).
However, when an expense is pre-paid, it is not incurred yet, because the procedure has not been performed.
In other words, when billing is separate from the procedure, the expense is incurred when the procedure is performed, not when the bill is paid.
This was decided in Tax Court case Robert S. Bassett, 26 T.C. 619 (1956)
https://casetext.com/case/bassett-v-commr-of-internal-revenue
There have been several revenue rulings since then expanding and clarifying on this rule,
https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/irs-limits-medical-expense-de...
https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-75-302/dbhh
https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-76-481/dbvk
Now, I am not a lawyer. But something stands out to me. Basset v Commissioner was decided on the basis that the advance payments to the hospital for the future care of Basset's mother-in-law were voluntary. The hospital's normal practice was to bill weekly in advance, so Bassett was not obligated to make any payment until that point. In Rev. Ruling 75-302, the issue was care provided to a person entering a nursing home. A contractual obligation was incurred when the patient entered the nursing home, with a refund provision and a penalty provision if the patient terminated the contract and left the home. The advance payments were allowed because the obligation had been incurred. In the other rulings, including the most recent Rev. Ruling 93-72, the IRS affirms that only advance payments for lifetime care are deductible.
However, in my non-lawyer opinion, Basset v Commissioner did not turn on the issue of lifetime care, it turned on when the payments were obligated. And while the other revenue rulings were for lifetime care arrangements, the case in 75-302 involved a facility that allowed their patients to end the contract and leave the facility, with a pro-rated refund minus a penalty. (The other cases involve a no-refund policy.)
So it seems to my non-lawyer opinion that, if your orthodontics contract creates a legal obligation, with either a no-refund policy or a pro-rated refund with a penalty if you decide to stop treatment with that orthodontist, it might fit within Basset v. Commissioner even though it would go against all the subsequent rulings and clarifications. If you got audited and the HSA withdrawal was disallowed, it would be subject to income tax plus a 20% penalty, and you would have to go to the Tax Court and try and argue that the 75-302 supports your position, and the other revenue rulings impermissibly narrowed the scope of Basset v. Commissioner by limiting the exception to lifetime care arrangements when no such limitation was proposed in the court decision. It would be a tricky battle to fight.
Anyway, that's the legal basis for disallowing the use of HSA funds to pay an advance bill for care that has not been provided.
