Posted by Cyndi Moore
Jul 15, 2022- Dickinson Wright
Dickinson Wright’s All Things HR Blog is beginning a multi-part series on issues and questions faced by employers in response to the June 24, 2022, U.S. Supreme Court ruling in Dobbs v. Jackson Women’s Health Organization overruling the constitutionally protected right to an abortion and giving each state the right to ban or regulate access to abortions. These posts are intended to be informative summaries to bring human resources personnel and employers up to speed in this rapidly-changing landscape.
Part I of our series addresses whether expenses relating to abortion may be reimbursed from a health flexible spending account (“FSA”), health reimbursement arrangement (”HRA”) and/or a health spending account (“HSA”).
Overview of FSAs, HRAs, and HSAs
A health FSA, which is typically funded by employee pre-tax contributions, may reimburse any medical expense as defined in Section 213(d) of the Internal Revenue Code of 1986, as amended (the “Code”). Prop. Reg. §1.125-5(k)(1). Reimbursable expenses may be limited by the plan’s terms, so employers should review their plans to determine if there are any plan-based restrictions or limitations on the types of medical expenses that may be reimbursed from the FSA. In particular, the scope of reimbursable expenses should be reviewed if the FSA is a “limited purpose” FSA designed to pay expenses only after the deductible under a high deductible health plan has been satisfied.
An HRA, a form of medical reimbursement account funded solely by an employer, may reimburse any medical expense as defined in Code Section 213(d). Notice 2002-45, II. As in the case of an FSA, employers should review their HRA plan terms to determine if the plan includes limits on the types of expenses that are reimbursable. For example, many HRAs are designed to reimburse an employee only for part or all of the deductible and coinsurance under the employer’s major medical plan. That type of HRA could not reimburse abortion-related expenses in excess of the deductibles or coinsurance, absent an amendment.
An HSA, which is funded by an employer and/or an employee, may make a tax-free distribution for any “qualified medical expense,” as defined in Code Section 213(d), of the account holder, his/her spouse, and dependents, but only if the expense is not reimbursable by insurance or otherwise. Code §223(d)(2)(A).
Tax Rules
To sum up, an FSA, HRA and/or HSA may reimburse medical expenses as defined in Code Section 213(d). Code Section 213 allows a deduction on an individual’s federal income tax return for medical care of the individual that exceeds 7.5% of adjusted gross income. Code Section 213(d) defines medical care. In the pertinent part, it says:
(1) The term “medical care” means amounts paid -
(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,
(B) for transportation primarily for and essential to medical care referred to in subparagraph (A) …,
(2) Amounts paid for certain lodging away from home treated as paid for medical care.
Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for, and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if -
(A) the medical care referred to in paragraph (1)(A) is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital), and
(B) there is no significant element of personal pleasure, recreation, or vacation in the travel away from home.
The amount taken into account under the preceding sentence shall not exceed $50 for each night for each individual.
The related tax regulations further define the types of expenses that fall within the definition of medical care to include, among other items, hospital services, nursing services, medical, laboratory, surgical, other diagnostic and healing services, X-rays, and medicine and drugs. Amounts expended for illegal operations or treatments are not reimbursable medical expenses. Treas. Reg. §1.213-1(e)(1)(ii).
The IRS ruled in 1973 that an abortion obtained by a woman in a hospital was deemed to be for “affecting a structure or function of the body” and qualified as “medical care” under Code Section 213(d). Rev. Rul. 73-201. A critical component of this ruling is that the operation was not illegal under state law.
Expenses Directly Relating to the Abortion Procedure
Under the preceding authorities, the costs related to an abortion procedure would be reimbursable under an FSA, HRA, or HSA (assuming the terms of the FSA or HRA cover such an expense) if the abortion is legal under state law. Rev. Rul. 73-201 does not address which state law applies for this purpose. Possibilities include the state where the patient resides or the state where the procedure is performed, or where a drug is obtained, taken, or its effect occurs. The answer to this question is also complicated because state laws may be enacted that purport to make abortion illegal, even if a state resident obtained the abortion in a state where the procedure is legal. We anticipate that the extraterritorial reach of state laws will be contested for years to come.
The practical question is how an employer, insurer, or a medical claims third party administrator (“TPA”) is to determine whether an abortion is legal under state law. Does the TPA need to be familiar with the laws of all 50 states (plus U.S. territories, possessions, and other jurisdictions with relevant law)? Can it rely on a certification of the participant that the procedure was legal? Will an employer or TPA have exposure under a Texas-style “aiding and abetting” law? (Please see our prior client alert for information on “aiding and abetting” laws.) If so, will these parties decide, as a risk mitigation strategy, that they will not cover abortions or process provider payment or reimbursements for abortion services, even if it was legal in the state where obtained, and potentially even if the patient’s life is endangered, or the pregnancy was the result of rape or incest?
Travel Expenses
Justice Kavanaugh’s concurring opinion in Dobbs states his view that a state could not constitutionally ban travel to seek an abortion in another state. In his June 24, 2022, press release, U.S. Attorney General Merrick Garland affirmed the Biden Administration’s view that travel to obtain an abortion is constitutionally protected, stating “…under bedrock constitutional principles, women who reside in states that have banned access to comprehensive reproductive healthcare must remain free to seek that care in states where it is legal.”
The President’s “Executive Order Protecting Access to Reproductive Healthcare Services,” issued on July 8, 2022, does not explicitly mention travel, but it does direct the Attorney General to provide technical assistance “concerning Federal constitutional protections to states seeking to afford legal protection to out-of-state patients and providers who offer legal reproductive healthcare.”
Under Code Section 213(d), expenses for medical care include “transportation primarily for and essential to medical care.”・Code Section 213(d)(1)(B).・It appears that under current tax law, an FSA, HRA, or HSA could reimburse employees for transportation costs from one state to another state to obtain an abortion. This would include the cost of travel by airplane, bus, train, or rental car. Travel in a personal automobile is reimbursable at the IRS rate of 22 cents per mile for expenses incurred on and after July 1, 2022.
Meals and Lodging
As noted previously, Code Section 213(d)(2) provides that lodging expenses of up to $50 per night are treated as medical expenses if the individual is away from home “primarily for and essential to” medical care and the medical care is “provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital) …”・However, meals purchased in connection with such travel are not considered to be expenses related to medical care and are not reimbursable.
Lodging is important for several reasons. First, depending on the length of travel, it may not be practical for a patient to travel to and from their home state without an overnight stay. Second, according to the KFF website, approximately 27 states have waiting periods ranging from 24 to 72 hours between provider counseling and the abortion procedure. Therefore, a patient may need to stay overnight for one or more days to obtain an abortion.
Another unanswered question is whether an outpatient abortion clinic is “a medical care facility which is related to, or the equivalent of, a licensed hospital” under Code Section 213(d)(2)(A). Some states require abortion clinics to meet the standards applicable to ambulatory surgery centers. Those clinics may be deemed the equivalent of a licensed hospital; it’s unclear if other clinics not related to a hospital or not so licensed would qualify under this standard. Under its current make-up, it is unlikely Congress would amend Section 213 to clarify this provision. Still, the IRS could issue interpretive guidance on the meaning of “equivalent to a licensed hospital” for purposes of access to reproductive healthcare.
If Republicans take control of Congress in the mid-term elections in November 2022, it’s also possible they could push to pass the “Abortion is Not Health Care Act of 2021” (H.R. 380) in the next term. This law would amend Code Section 213 to add a new paragraph (g), which would provide that an amount paid for an abortion is not deductible by an individual on her individual federal income tax return. The Senate version (S. 124) has an exception to this rule if the mother’s life is in danger or in the event the pregnancy results from rape or incest. Neither bill currently modifies Code Section 213(d), so if enacted in its current form, it appears that legal abortion could remain reimbursable under an FSA, HRA, or HSA. Even if Republicans take control of Congress, it is nearly certain that President Biden will veto any Congressionally-passed restriction.
Summary
In sum, the following expenses may be reimbursed from an FSA, HRA, or HSA under current federal tax law:
Many of the issues raised above will depend on the interpretation of the IRS or the courts. This makes an employer’s ability to successfully navigate the law on abortion coverage a constantly moving target. The Dickinson Wright Employee Benefits and Executive Compensation Group has been and will continue to monitor the impact of these issues as they evolve to advise clients on how best to respond to this changing landscape.