Jane Dotson
Health insurance is designed to cover medical expenses, but there are times when an individual might pay out of pocket and later seek reimbursement. In the US, there are various types of health insurance plans, and the coverage and reimbursement processes can vary. Some common types of health insurance include employer-funded plans, flexible spending accounts, health savings accounts, and self-funded insurance for the self-employed. Understanding what expenses are covered and how to claim reimbursement can be complex, and it's important to carefully review the terms of your specific insurance plan. In addition, tax implications related to medical expenses and reimbursements should be considered, as certain conditions and deductions may apply.
| Characteristics | Values |
|---|---|
| Medical expenses that can be reimbursed | Prescription medicines or drugs, insulin, admission and transportation to a medical conference, false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, guide dogs or other service animals, crutches, wheelchairs, transportation, premiums paid for insurance, long-term care services, limited amounts paid for any qualified long-term care insurance contract, non-cosmetic surgery, and more |
| Medical expenses that cannot be reimbursed | Cosmetic surgery, funeral or burial expenses, non-prescription medicines, toothpaste, toiletries, cosmetics, trips for the general improvement of health, nicotine gum and patches that don't require a prescription, vitamins, health club dues, diet food, non-prescription nicotine products, and more |
| Medical expenses that can be reimbursed by the WTC Health Program | Past out-of-pocket medical expenses paid as a result of eligible conditions before the date that the WTC Health Program certified the condition(s) |
| Medical expenses that cannot be reimbursed by the WTC Health Program | Expenses incurred after the condition was certified if you decide to have the conditions treated by a non-WTC Health Program physician, or to have prescriptions filled by an unaffiliated pharmacy |
| Medical expenses that can be deducted from taxes | Unreimbursed expenses for preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, and more |
| Medical expenses that cannot be deducted from taxes | Any medical expenses that have been reimbursed, such as by your insurance or employer, medical expenses paid in a different year, expenses paid using money from a flexible spending account or health savings account, and more |
| Medical expense reimbursement accounts | HSAs, HRAs, ICHRAs, EBHRAs |
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What You'll Learn
Health reimbursement accounts
There are tax advantages associated with HRAs. Reimbursements for eligible medical expenses are generally not considered taxable income, and employees usually receive the full amount without paying federal or state income taxes. Employers can also choose to set up the plan so that unused HRA funds roll over from year to year, although this is not a requirement. If an employee leaves the company with unused funds in their HRA, the employer can keep the money.
The Internal Revenue Service (IRS) provides guidelines for what constitutes a medical or dental expense. These include expenses for the diagnosis, cure, mitigation, treatment, or prevention of a disease, as well as payments affecting any structure or function of the body. Transportation expenses, such as gas, tolls, parking, and ambulance costs, may also be included. Additionally, premiums paid for insurance that covers medical care or qualified long-term care services are considered medical expenses. Certain costs related to nutrition, wellness, and general health may also qualify as medical expenses. However, expenses such as vitamins, vacations, and cosmetic surgery are typically not included.
It is important to note that if an individual has medical expenses reimbursed through an HRA, they cannot include those expenses in their medical expense deductions on tax returns. This is because the reimbursement is not considered taxable income. Individuals should carefully review the guidelines provided by the IRS and consult with their employer to understand what specific expenses are eligible for reimbursement through their HRA.
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Deductibles and tax
Health insurance policy premiums aren't the only expenses you can write off. There are several other out-of-pocket expenses that are also deductible. These include:
- Transportation expenses, such as the cost of gas, incurred when getting medical care.
- Travel expenses for medical care, including gas, oil, tolls, parking, taxi, bus, or train fare, and ambulance costs.
- Insurance premiums to cover medical care or qualified long-term care.
- Costs related to nutrition, wellness, and general health.
- Inpatient hospital care or residential nursing home care, if medical care is the principal reason for being in the nursing home.
- Acupuncture treatments.
- Inpatient treatment at a centre for alcohol or drug addiction.
- Participation in a smoking-cessation program and prescription drugs to alleviate nicotine withdrawal.
- Membership to a health club, in limited situations, primarily for the purpose of preventing or alleviating obesity.
- Insulin and prescription medicines or drugs.
- Admission and transportation to a medical conference relating to a chronic illness for you, your spouse, or your dependent.
- False teeth, reading or prescription eyeglasses, contact lenses, hearing aids, a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities, crutches, and wheelchairs.
If you are self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction. This is an adjustment to income, rather than an itemized deduction, for premiums you paid on a health insurance policy covering medical care, including a qualified long-term care insurance policy for yourself, your spouse, and dependents.
Additionally, if you itemize your deductions for a taxable year on Schedule A (Form 1040), you may be able to deduct medical and dental expenses for yourself, your spouse, and your dependents during the taxable year if they exceed 7.5% of your adjusted gross income for the year. It's important to note that this deduction only applies to expenses not compensated by insurance or other means, regardless of whether you receive the reimbursement directly or a payment is made on your behalf to the medical provider.
Furthermore, if you have medical expenses that are reimbursed by a health reimbursement arrangement (HRA), you cannot include those expenses in your medical expenses deduction. Similarly, if you are covered under social security or are a government employee who paid Medicare tax, the payroll tax paid for Medicare Part A is not considered a medical expense. However, if you are not covered under social security and did not pay Medicare tax as a government employee, you can voluntarily enrol in Medicare Part A and include the premiums you paid as a medical expense.
Lastly, it's worth noting that employers can generally write off the cost of health insurance they purchase for themselves or their employees as a business expense. Employees can also claim tax deductions on payments made towards health insurance premiums in certain cases, such as when they pay for premiums through pre-tax payroll deductions or can be reimbursed through an HRA.
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Out-of-pocket expenses
Deductibles are the amount an individual pays each year for covered costs before their insurance coverage kicks in. For example, if someone has a deductible of $1,500, they must pay all costs for most covered health services until they reach that amount. Once the deductible is met, the policyholder "shares" the costs with the insurance plan through coinsurance. With an 80/20 plan, for instance, the policyholder pays 20% of the cost while the insurance plan covers the remaining 80%. The amount paid for coinsurance, as well as copays and the deductible, all count towards the out-of-pocket maximum for the year. When the out-of-pocket maximum is reached, the insurance plan pays 100% of the covered costs for the rest of the year.
In the United States, the Affordable Care Act (ACA) has implemented improvements for consumers, including a limit on out-of-pocket costs. For 2024, the maximum out-of-pocket amount for an individual is $9,450, and for a family, it is $18,900. These caps are subject to change annually and will decrease in 2025 to $9,200 and $18,400, respectively. It is important to note that health plans can set their own out-of-pocket spending caps, which may be lower than the maximum allowable limits.
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Qualifying conditions
To qualify for reimbursement of medical expenses, certain conditions must be met. These conditions vary depending on the specific health insurance plan and the jurisdiction. Here are some common qualifying conditions:
- Medical Care Expenses: Medical care expenses must be primarily aimed at alleviating or preventing a physical or mental disability or illness. This includes payments for diagnosis, cure, mitigation, treatment, or prevention of diseases, as well as treatments affecting the structure or function of the body. It also covers qualified long-term care services and limited amounts paid for qualified long-term care insurance contracts. However, expenses that are solely beneficial to general health, such as vitamins or vacations, are typically not reimbursable.
- Transportation Expenses: Amounts paid for transportation to and from medical appointments can be eligible for reimbursement. This includes out-of-pocket expenses for personal vehicles, such as gas and oil, as well as standard mileage rates, tolls, parking fees, and public transportation costs.
- Insurance Premiums: In certain cases, the premiums paid for health insurance policies that cover medical care or qualified long-term care may be reimbursable. However, it is important to note that premiums treated as paid by an employer, such as through a premium conversion plan or cafeteria plan, are usually not deductible.
- Specific Medical Items and Services: Reimbursement may be available for specific medical items and services, such as prescription medicines, false teeth, eyeglasses, contact lenses, hearing aids, service animals, crutches, and wheelchairs.
- Medical Conference Expenses: Amounts paid for admission and transportation to a medical conference related to a chronic illness for oneself, a spouse, or a dependent may qualify for reimbursement. However, meal and lodging costs during the conference are typically not reimbursable.
- Life Changes and Special Circumstances: Certain life changes and special circumstances can qualify individuals for special enrollment periods and potential reimbursement. These include gaining access to new health insurance plans, changes in citizenship or residency status, losing coverage after leaving active duty or reserve duty, becoming a member of a federally recognized American Indian tribe, losing a dependent due to divorce or separation, and losing existing health coverage.
- Health Reimbursement Arrangements (HRAs): HRAs are account-based health plans that allow employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums, copayments, and deductibles. Employees must be enrolled in individual health insurance coverage to use these funds.
- Cost-Sharing Reductions: Choosing a Silver plan in the Health Insurance Marketplace may qualify individuals for "cost-sharing reductions," which can result in significant savings on deductibles, copayments, and coinsurance.
It is important to carefully review the specific terms and conditions of your health insurance plan and consult official sources to determine the exact qualifying conditions for reimbursement of medical expenses.
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Insurance premiums
Health insurance premiums are the monthly fees that policyholders pay to maintain their health coverage. These premiums are typically paid regardless of whether the policyholder uses any medical services during that period. While premiums are a fixed cost, they can vary significantly depending on the plan's metal level, the insurer, the enrollee's age, and the geographical location. For instance, the average full-price premium before subsidies for Marketplace plans in 2024 was about $603 per month. However, it's important to note that most people with Marketplace coverage receive subsidies that significantly offset their premium costs. In fact, as of 2024, 93% of enrollees received premium subsidies, resulting in an average after-subsidy premium of about $105 per month.
When considering health insurance plans, it's essential to evaluate not only the monthly premium but also other costs like deductibles, copayments, and coinsurance. These additional costs can sometimes exceed the premium amount, so careful consideration is necessary to choose the most cost-effective plan for your needs. For example, if you or your dependents have a chronic illness, a plan with a higher premium but a lower deductible may be more financially prudent. On the other hand, a lower premium with a higher deductible could be advantageous if you generally have minimal healthcare needs.
To make an informed decision, individuals should utilize the tools provided by health plan websites and consult certified brokers to compare available options and understand the total costs, including premiums and out-of-pocket expenses. These tools help assess the level of care you anticipate requiring and identify the plan that best suits your financial situation. Additionally, it's worth noting that health insurance premiums may be eligible for reimbursement through specific programs or arrangements, such as the WTC Health Program or a Health Reimbursement Arrangement (HRA).
In certain circumstances, health insurance premiums themselves can be reimbursed. For example, if you are self-employed and have a net profit for the year, you may qualify for the self-employed health insurance deduction. This deduction is an adjustment to income rather than an itemized deduction for premiums paid on a health insurance policy covering medical care for yourself, your spouse, and your dependents. Furthermore, if you are not covered under social security and voluntarily enroll in Medicare Part A, you can include the premiums paid as a medical expense for tax purposes.
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Frequently asked questions
Yes, you can deduct your medical expenses from your taxes if they exceed 7.5% of your adjusted gross income (AGI). You must itemize your deductions on IRS Schedule A.
You can deduct unreimbursed expenses for preventative care, treatment, surgeries, dental and vision care, and visits to psychologists and psychiatrists. You can also include insurance premiums, transportation to and from medical care, and qualified long-term care services.
You cannot deduct expenses for cosmetic procedures, non-prescription drugs (except insulin), vitamins, diet food, and non-prescription nicotine products. You also cannot deduct expenses for health clubs, funerals, or trips to improve your general health.
Yes, you may be able to get reimbursed for out-of-pocket medical expenses through a Health Reimbursement Arrangement (HRA) or a Health Savings Account (HSA). These are employer-funded plans that allow employees to be reimbursed tax-free for qualified medical expenses.
