Are prepaid orthodontics expenses eligible for HSA reimbursment?

[hti708]

I just paid for my child's multi-year orthodontic treatment plan. I paid in-full my part of the cost of the treatment plan (the difference between the total cost of the treatment plan and what my insurance will pay). I have an HSA. Can I reimburse myself now for the full cost of the multi-year treatment plan from my HSA? Or do I have to wait until my child has finished the entire treatment plan to withdraw funds from my HSA? I've searched the internet and read through multiple IRS pubs and can't find an answer. It seems most FSA providers allow for a reimbursement of pre-paid orthodontics with a signed contract with the orthodontist (which I have) and a payment receipt (which I also have). I can't find any similar guidance on HSA withdrawals. Thank you.

[Bsch4477]

You can use the HSA funds to pay future dental expenses if you get an itemized statement from the dentist attesting to the charges that will be made for qualifying dental expenses. 

[hti708]

Thanks for the reply. I have a signed "Federal Truth in Lending Disclosure Statement for Professional Services Rendered" that I signed that has the patient's name, type of orthodontic treatment, estimated treatment time, and the part of the cost I'm responsible for (that's the amount I paid in full). Is that the type of document you're referring to as an "itemized statement?"

[Bsch4477]

That should do it. 

[Opus 17]

This is a bit unclear in publication 502.

https://www.irs.gov/pub/irs-pdf/p502.pdf

You can't take a tax deduction for pre-paid future medical expenses.  That is explicitly stated in publication 502.   I assume that if you pay for an expense in 2024 and the expense occurs in 2025, you can deduct it in 2025, because that's "fair", but that is not explicitly stated in publication 502. 

The rules for FSAs are a bit different than publication 502, and the tax regulations place the burden of making sure that the rules are followed on the benefit plan administrator, not the taxpayer, which is why you usually need to submit proof to the FSA plan administrator.  However, for HSAs, allowable expenses for HSA are the same as allowable expenses for the deduction, and the burden is on the taxpayer to self-certify that the expenses are allowable.  

I think you will be on safer ground if you only reimburse yourself from the HSA in 2024 for expenses incurred in 2024, and reimburse yourself for future expenses in the year they occur.  Without doing a lot more research, I can't definitely say that taking full reimbursement now is not allowed, but I am not sure the situation is as the other volunteer suggested.  The consequences, if you are audited and the reimbursement is disallowed, is the disallowed portion is subject to income tax plus a 20% penalty.  

@dmertz  @Hal_Al 

[hti708]

That language in Pub 502 is what gave me pause about reimbursing the full amount I paid right now from my HSA. The difficulty with my child's orthodontic work is that we really have no way of knowing what expenses are incurred on each visit to the orthodontist. We paid one price that includes the current treatment plan (and any adjustments to that plan along the way until we are finished).

That's why I'm wondering if the safest bet (although not my preference) would be to wait to withdraw the entire amount once my child has completed the entire orthodontic treatment plan (which could be a couple of years).

[Opus 17]

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@hti708 wrote:

That's why I'm wondering if the safest bet (although not my preference) would be to wait to withdraw the entire amount once my child has completed the entire orthodontic treatment plan (which could be a couple of years).

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I think you can make a reasonable allocation.  For example, if the program is expected to be 24 months, you could withdraw 1/24th per month, even if the treatment ends up going longer.   The tax regulations allow this sort of allocation in other areas.  Waiting until the end is certainly another allowable option. 

[dmertz]

I don't think that Pub 502 applies other than that medical expenses paid with funds from the HSA can't be claimed on Schedule A and to define the types of expenses that could be qualified medical expenses.

Section 223(f)(1) states:

Any amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income.

IRS guidance makes reference to medical expenses being "incurred," but doesn't seem to indicate whether or not the expense is incurred at the time it is paid or is incurred at the time the work is performed.  I suspect that the repayment can be obtained from the HSA anytime after the expense is paid using other funds.  Still, the longer that the funds remain in the HSA the longer the funds can grow via investments to be used tax-free for any qualified medical expenses that are incurred after the establishment of the HSA, so unless funds are tight, it would probably reasonable to wait to obtain the reimbursement.

[Mike9241]

from IRS PUB 502 medical expenses

What Expenses Can You Include This Year?
You can include only the medical and dental expenses
you paid this year, but generally not payments for medical
or dental care you will receive in a future year

from PUB 969 HSA

Qualified medical expenses. Qualified medical expenses
are those expenses that would generally qualify for
the medical and dental expenses deduction. These are
explained in Pub. 502, Medical and Dental Expenses.

thus I conclude the prepaid portion can't be reimburse by the HSA.  You might want to ask the practioner if they will provide you with a statement of what portion of the prepayment was utilized. 

another option - no authoritative support - is to prorate over the period of the proposed treatemnt so if it was 25 months that would be 4% for each month of treatment. 

[hti708]

So I did some digging starting with Section 223(f)(1) and I'm wondering if my logic makes sense:

Section 223(f)(1) says:

Any amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income.

Section 223(d)(2)(A) defines “qualified medical expenses” as those that are defined in section 213(d)  (Medical, dental, etc., expenses). So I went to 213(d) and it the only reference I can find to a time frame of allowable deductions is in 213(a)  (emphasis mine):

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 (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

So then I pulled up CFR section 1.213-1(a)(1)  (Medical, dental, etc., expenses) which says (again emphasis mine):

Section 213 permits a deduction of payments for certain medical expenses (including expenses for medicine and drugs). Except as provided in paragraph (d) of this section (relating to special rule for decedents) a deduction is allowable only to individuals and only with respect to medical expenses actually paid during the taxable year, regardless of when the incident or event which occasioned the expenses occurred and regardless of the method of accounting employed by the taxpayer in making his income tax return. Thus, if the medical expenses are incurred but not paid during the taxable year, no deduction for such expenses shall be allowed for such year.

So I would assume the CFR has precedent over language in an IRS pub? If so, does my logic/argument make sense here that essentially the CFR bases the deduction on when I pay for medical expenses not when I incur them?

[Opus 17]

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. 

[hti708]

Thank you for the thorough answer and research. I think at this point the best thing for me to do is just wait until my child's orthodontics treatment is complete and then withdraw the full amount from my HSA. I really appreciate the responses here. Thank you.