Private Letter Rulings from the IRS provide useful guidance on how they view and will handle certain situations, even if identifying information is redacted from the letter. A recent redacted ruling focused on ancestry genetic testing and whether those costs are payable by a Health Flexible Spending Account (FSA). The IRS found that at least a portion of the test could be covered by funds from a Health FSA, as the testing is medical care.
Deducting Expenses for Medical Care
The IRS allows taxpayers to deduct medical expenses if they exceed 10% of the individual’s adjusted gross income. This includes expenses for the diagnosis, cure, mitigation, treatment, and prevention of illness and disease and includes medical and other diagnostic services. Expenditures that are for the general health of a person, such as menstrual products, are not considered medical care. The IRS already allows individuals to break out fees where some portion of the fee covers medical care. This includes, for example, lump sum student services fees where part of the fee is for medical care.
Similarly, a diagnosis includes determination on whether a disease is present and includes tests that show the disease is not present and tests of changes in bodily function. Pregnancy tests, full-body scans, and other diagnostic tests performed without a physician’s recommendation are still considered medical care and can be reimbursed from a Health FSA.
IRS Private Ruling
While much of the information in the letter was redacted, we do know that the question concerned whether a taxpayer with an FSA could use the FSA to purchase a genetic testing service that includes a report on the taxpayer’s ancestry and health. The kit collects a DNA sample which is sent to the testing service. The testing service then sends the sample to a third party laboratory for genotyping. The results from the lab are sent back to the testing service for analysis.
The stated goal of the genetic testing was to get individuals to provide genetic information to their healthcare providers. Individuals could not purchase the health-related services from the testing company without also purchasing the ancestry services. However, in order to use a Health FSA to cover genetic testing, the testing must be defined as medical care. The IRS ruled that portions of the testing, such as genotyping and ancestry reports, are not medical care, but other services offered by the service would be considered medical care. The taxpayer is left to allocate the cost between these non-medical services and the medical services provided. The taxpayer must use a “reasonable method” to allocate value between the services provided. The testing service, however, is not required to provide this data to the taxpayer.