Insurance Reform Can Boost MNT

The IRS Rules Obesity to Be a Disease: Medically Valid Weight Loss Programs Are Tax-Deductible and Qualify in New Health Savings Accounts

Although April’s tax deadline can be tough to meet for many Americans, recent IRS tax law changes offer some relief for a growing segment of the population - the now two-thirds of Americans who are overweight or obese. IRS’s stance can make the costs associated with obesity treatment easier to bear by providing relief for individuals who have large medical expenses, including those who are undergoing medical treatment for obesity and itemize deductions. With income tax forms due this month, have you passed on the news to your clients that nutrition services may be tax deductible?

The Internal Revenue Service ruled in April 2002 that “uncompensated amounts paid by individuals for participation in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are expenses for medical care that are deductible… subject to certain limitations. The cost of purchasing diet food items is not deductible.”1. This ruling allows taxpayers who are forced to pay thousands of dollars for services related to their disease or weight condition to deduct those expenses. Deductible medical expenses can include items such as bariatric surgery, approved anti-obesity agents and nutrition counseling services. Before the April 2002 ruling, weight loss programs were believed to be deductible only if a doctor recommended them as treatment for heart disease or other co-morbid conditions. Now that the IRS has defined obesity as a disease, taxpayers are also able to deduct medical expenses related to obesity treatments ordered by a physician.

Specific to medical expenses for obesity, the IRS ruling states “obesity is medically accepted to be a disease in its own right.” To take the deduction, a taxpayer will have to participate in a weight-loss program for medically valid reasons. Simply joining a gym or a weight control program to "improve the taxpayer's appearance, general health and sense of well-being" without a physician's guidance will not qualify. As noted above in the IRS ruling, diet or reduced-calorie food expenses are not deductible, even if they are an integral part of the weight loss plan. The IRS reasons that people have to pay for food whether or not they are trying to lose weight. IRS Publication 502 provides guidance for those completing tax forms1 (see side bar). The tax code indicates that total medical expenses must exceed 7.5 percent of an individual’s adjusted gross income and can only be taken by taxpayers who itemize their deductions. This means that a person with an AGI of $50,000 would be able to deduct medical expenses that exceed $3,750. Many individuals do not, however, have enough medical expenses to qualify for a deduction. According to an IRS study, only 5 percent of taxpayers deducted any medical expenses in 2000. Taxpayers are advised to consult with professionals before taking any deductions in this area.

Additional Savings for Nutrition Services through Tax-Favored Health Savings Vehicles
Individuals who are beneficiaries of health savings vehicles of which they, their family members or employers have set aside pretax dollars (i.e. flexible spending accounts, health reimbursement arrangements and the newly created health savings accounts) may also benefit because these vehicles use the IRS definitions of allowable medical expense deductions. This means consumers achieve savings on medically valid nutrition services by using their pretax health reimbursement account dollars. In particular, the same expenses that are allowable for tax deductions for weight-loss programs also apply to HSAs, according to IRS publications2. Like 401(K) plans but for healthcare, HSAs allow individuals to accumulate dollars to spend on future health-care costs. Congress passed into law the creation of HSAs in the Medicare Prescription Drug, Improvement and Modernization Act of 2003, effective January 1, 2004. The statute requires that HSAs be linked with at least a $1,000 deductible health plan for individuals and at least a $2,000 deductible health plan for families, which are referred to as a high-deductible health plan. An added feature of HSAs is that money is not lost if it is unused at the end of the year - the money can be rolled over and used for health care costs in future years.

The IRS issued guidance on March 30, 2004, about HSAs for both group and individual insurance markets. Notice 2004-23, which is part of the guidance, provides ‘safe harbor’ enabling HDHPs offered alongside with HSAs to offer a range of preventive care benefits without those benefits satisfying the minimum deductible that the law requires for HDHPs linked with HSAs3. The notice provides a list of types of preventive care that would qualify, among which were health routine prenatal and well-child care, annual physical examinations, obesity weight-loss programs and a range for screenings for cancer, heart and vascular disease, infectious diseases, mental health conditions and other conditions. This means that individuals don’t have to reach the deductible to start withdrawing money from the HSAs to cover MNT for weight loss.

Treasury Department benefits tax counsel, William F. Sweetnam, said at the March 30 briefing that the Treasury’s view in crafting the preventive care guidance was that preventive care generally does not include services that “treat an existing illness.” The notice states that ‘safe harbor’ is not limited only to the listed services and that the IRS requests comments “on the appropriate standard for preventive care and in particular, recommendations concerning any benefit or service that should be added to those set forth in this notice and appendix.” The IRS is also requesting comments regarding “the extent to which benefits provided by an employee assistance program, mental health program or wellness program may quality as preventive care, including comments regarding the scope of treatments provided as benefits through counseling and health assessments.” Members are urged to read the notice3 and submit comments to the IRS. The notices, revenue ruling and revenue procedure are scheduled for publication in Internal Revenue Bulletin 2004-15, dated April 15. Additional notices regarding HSAs will be issued in 2005.

While Medicare-eligible individuals cannot contribute to an HSA, there is no language in the current IRS tax code that would prohibit them from using a pre-established HSA for a doctor-prescribed weight loss program or other medical nutrition therapy services. However, other limitations and constraints apply and will dictate eligibility and qualifications to set up HSAs or other flexible spending and health reimbursement accounts. Consumers should consult with their employer and their professional tax advisor to determine if they qualify for an HSA and to determine other possible restrictions.

Accessed March 2, 2004, from http://www.irs.gov/publications/p502/ar01.html

1 26 CFR 1.213-1: Medical, Dental, etc., Expenses.), Section 213, accessed from http://www.irs.gov/pub/irs-drop/rr-02-19.pdf. March 22, 2004.
2 Internal Revenue Service, Publication of 2003 -2004 tax changes, accessed from http://www.irs.gov/publications/p553/ch01.html#d0e1215. March 22, 2004.
3 Internal Revenue Service Notice 2004-23 accessed from http://www.irs.gov/pub/irs-drop/n-04-23.pdf