The IRS has issued Announcement 2021-7, which confirms that personal protective equipment (“PPE”) such as masks, hand sanitizer, and sanitizing wipes purchased “for the primary purpose of preventing the spread of COVID-19” are qualified medical expenses under Internal Revenue Code (“Code”) Section 213(d).
Law. Amounts paid by an individual taxpayer for qualified medical expenses for the taxpayer, the taxpayer’s spouse, or dependents that are not compensated for by insurance or otherwise are deductible under Code Section 213(a) if the taxpayer’s total medical expenses exceed 7.5% of adjusted gross income.
To be deductible under Section 213(a), or reimbursable through a group health plan or health FSA, the cost of an item or service must meet the definition of “medical care” expenses under Section 213(d). This Section defines medical care expenses as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body. An expense will qualify only if it is “primarily” for the “prevention” or alleviation of a physical or mental defect or illness, and only if the expense would not have been incurred but for the disease or condition.
IRS Guidance. Announcement 2021-7 clarifies that PPE expenses are eligible to be paid or reimbursed under a group health plan, health flexible spending arrangement (“health FSA”), health reimbursement arrangement (“HRA”), health savings account (“HSA”) or Archer medical savings account (“Archer MSA”). However, if a PPE expense is paid or reimbursed under a health FSA, HRA, HSA or Archer MSA, or any other health plan, it is not deductible under Code Section 213(a).
Group health plans, including health FSAs and HRAs, that currently do not cover certain COVID-19 expenses may now be amended under this guidance to authorize reimbursement of expenses for COVID-19 PPE incurred during any period beginning on or after January 1, 2020. Such an amendment will not cause any reimbursement to be includible in income or result in a Code Section 125 plan failing to meet the applicable requirements.
A group health plan may only adopt an amendment under this guidance if: (i) the amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective; (ii) no amendment with a retroactive effect is adopted after December 31, 2022; and (iii) the plan is operated consistent with the terms of the amendment (including during the period beginning on the effective date of the amendment through the date the amendment is actually adopted).
Employer Takeaway. Plan sponsors should review their plan documents with legal counsel to determine if they need to make any amendments in view of Announcement 2021-7.
Announcement 2021-7 is available at: https://www.irs.gov/pub/irs-drop/a-21-07.pdf