Section 213(d)

Section 213(d): What Counts as a Medical Expense?

Section 213(d) defines which medical expenses qualify for tax-free reimbursement under HRAs, FSAs, and HSAs—critical guidance for small businesses and employees.

Introduction to Section 213(d)

If you’ve ever wondered which medical expenses your business can reimburse tax-free, the answer usually starts with Section 213(d). Tucked inside the Internal Revenue Code, Section 213(d) lays out what the IRS considers a “qualified medical expense.” That definition drives how Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs), and Health Savings Accounts (HSAs) operate.

For small business owners and HR managers, this isn’t just tax trivia—it’s the rulebook. And for employees, it determines whether that dental bill, therapy visit, or prescription gets reimbursed or not.

Let’s break it down in plain English.

What Is Section 213(d)?

Section 213(d) of the Internal Revenue Code defines medical care expenses that may be deductible on a federal tax return. More importantly for employers, it determines what can be reimbursed on a tax-free basis through employer-sponsored benefit accounts like:

• ICHRA (Individual Coverage Health Reimbursement Arrangement)
• QSEHRA (Qualified Small Employer HRA)
• Traditional HRAs
• FSAs and HSAs

The IRS states that medical care includes amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease” and for treatments affecting any structure or function of the body. This language comes directly from the Internal Revenue Code and is further interpreted in IRS Publication 502, which is a helpful reference for employers and employees alike.

In short, if an expense fits within Section 213(d), it can generally be reimbursed tax-free through a compliant HRA.

Why Section 213(d) Matters for Small Businesses

Tax Advantages for Employers

Here’s the good news: reimbursements for Section 213(d) expenses are tax-deductible for the employer and tax-free to employees when structured properly under an HRA.

That means:

• No payroll taxes on reimbursements
• No federal income tax withholding
• No FICA burden on the reimbursed amount

Compared to simply giving employees a taxable stipend for medical costs, using a compliant HRA tied to Section 213(d) is far more efficient.

Compliance and Risk Management

Now, let’s be candid—this is where things can get tricky.

If a business reimburses expenses that do not qualify under Section 213(d), those reimbursements could become taxable income. Worse, the plan could fall out of compliance with IRS or ACA rules.

That’s why it’s critical to:

• Clearly define eligible expenses in plan documents
• Use a compliant administration process
• Verify that submitted expenses meet IRS criteria

It’s not about being overly cautious. It’s about protecting your company and your employees.

What Counts as a Section 213(d) Medical Expense?

Common Qualified Expenses

Most people are pleasantly surprised by how broad the definition is. Examples of qualified expenses include:

• Health insurance premiums (including individual marketplace plans)
• Doctor and hospital visits
• Prescription medications
• Insulin
• Mental health counseling
• Chiropractic care
• Dental treatment
• Vision exams, glasses, and contacts
• Physical therapy
• Certain medical equipment (crutches, blood sugar monitors, etc.)

For businesses offering an ICHRA, insurance premiums are often the largest reimbursable expense—and yes, they qualify under Section 213(d).

Expenses That May Require Extra Documentation

Some expenses can qualify but need additional substantiation, such as:

• Massage therapy (if prescribed for a medical condition)
• Weight-loss programs (if treating obesity diagnosed by a physician)
• Transportation primarily for medical care
• Certain home modifications for medical necessity

In these cases, a doctor’s note or proof of medical necessity may be required.

What Does Not Qualify?

This is where confusion often creeps in. The following typically do not qualify:

• Cosmetic procedures (unless medically necessary)
• Gym memberships (unless prescribed for a specific medical condition)
• Over-the-counter general health items without a medical purpose
• Vitamins for general wellness

IRS Publication 502 provides detailed examples, and it’s worth reviewing periodically since guidance can evolve.

Section 213(d) and ICHRA Plans

How It Works in an ICHRA

An ICHRA allows employers to reimburse employees for:

1. Individual health insurance premiums
2. Other qualified medical expenses under Section 213(d)

Employers can choose to reimburse:

• Premiums only, or
• Premiums plus other qualified expenses

This flexibility is one of the reasons ICHRA has become so popular with startups and small businesses.

Let’s say you set a $500 monthly allowance. An employee might:

• Spend $400 on an ACA marketplace plan
• Submit $100 in prescription or therapy expenses

As long as those expenses meet Section 213(d) standards and are properly substantiated, reimbursements remain tax-free.

Why Documentation Is Essential

The IRS requires third-party substantiation for medical expense reimbursements. That means:

• Receipts must show the date of service
• The type of service
• The amount paid
• The provider

Self-attestation alone isn’t enough.

If you’re managing reimbursements manually, this can quickly become a time sink. And frankly, it increases compliance risk if not done carefully.

What Employees Should Know About Section 213(d)

From the employee’s perspective, this section determines whether they’ll receive tax-free reimbursement or be stuck paying out of pocket.

Here’s what employees should keep in mind:

• Always keep itemized receipts
• Confirm coverage meets Minimum Essential Coverage (MEC) requirements
• Ask HR before assuming something qualifies

Employees sometimes assume “medical” equals “reimbursable.” That’s not always true. The IRS standard is specific.

For example:

• A dermatologist visit for acne treatment? Likely eligible.
• A cosmetic Botox procedure? Probably not.

When in doubt, check before submitting.

Owner Eligibility and Section 213(d)

Business owners often ask: “Can I participate too?”

The answer depends on how your business is structured:

• C-corporation owners who are bona fide employees can generally participate.
• S-corporation shareholders owning more than 2% face special rules.
• Sole proprietors and partners are typically treated differently under IRS guidelines.

The tax treatment of reimbursements for owners can vary significantly, so it’s important to review your entity structure carefully. IRS guidance and Treasury regulations govern these distinctions, and misclassification can create unintended tax consequences.

Administrative Best Practices for Employers

If you’re offering an HRA tied to Section 213(d), here are some practical guardrails:

1. Use written plan documents that clearly define eligible expenses
2. Provide employee education during onboarding
3. Ensure HIPAA-compliant handling of medical documentation
4. Maintain audit-ready records
5. Use automated tools when possible

The Department of Labor and the IRS both expect proper documentation and nondiscrimination compliance. Even small businesses aren’t exempt from these standards.

Trying to manage this on spreadsheets? It might work for a handful of employees—but it rarely scales well.

Common Misunderstandings About Section 213(d)

Let me clear up a few frequent misconceptions:

“It’s fine to reimburse anything health-related.”
Not necessarily. The IRS definition is narrower than most people think.

“If employees don’t use their allowance, we still pay it out.”
With HRAs, you only reimburse actual eligible expenses. No expense, no reimbursement.

“Premium reimbursements aren’t allowed.”
They are—especially under ICHRA and QSEHRA structures—if the coverage meets federal standards.

Clarity here saves a lot of headaches later.

Bringing It All Together with the Right Partner

Section 213(d) isn’t just a tax code citation—it’s the foundation for compliant, tax-efficient health benefits. For small businesses, understanding which expenses qualify protects your budget and your compliance standing. For employees, it ensures reimbursements stay tax-free and predictable.

At SimplyHRA, we help small businesses design and administer ICHRA and QSEHRA plans built around Section 213(d) rules. From automated expense verification and audit-ready reporting to AI-powered eligibility checks and payroll integration, we take the compliance burden off your plate so you can focus on running your business. If you’re an employer, HR manager, or employee with questions about how Section 213(d) impacts your health benefits, email us at info@simplyhra.com or schedule a call at https://www.simplyhra.com/contact. Let’s make health benefits simpler—and fully compliant.

How Section 213(d) Interacts with Other Federal Laws

When we talk about Section 213(d), we’re talking tax code. But health benefits don’t live in a tax-only bubble. They intersect with the Affordable Care Act (ACA), ERISA, HIPAA, and Department of Labor guidance. If you’re a small business owner or HR manager, it’s important to see the bigger picture.

Section 213(d) and the ACA

The ACA requires certain employer health plans to meet market reform rules, such as covering preventive services without cost-sharing. Standalone HRAs used to violate these rules unless integrated with group coverage.

That changed in 2019 when the Departments of Treasury, Labor, and Health and Human Services finalized regulations allowing ICHRA. Now, employers can reimburse individual coverage premiums and other Section 213(d) expenses while remaining ACA-compliant—if structured correctly.

Key compliance guardrails include:

• Employees must be enrolled in individual health insurance that provides Minimum Essential Coverage (MEC).
• Employers must offer ICHRA on uniform terms within defined employee classes.
• Required notices must be distributed at least 90 days before the plan year begins (or upon eligibility for new hires).

Section 213(d) determines what’s reimbursable. ACA regulations determine how the plan must be structured. Both matter.

ERISA Plan Documentation Requirements

Even small employers offering an HRA are generally creating an ERISA-covered welfare benefit plan. That means you need:

• A formal plan document
• A Summary Plan Description (SPD)
• A defined claims and appeals process

Section 213(d) shapes the reimbursement rules, but ERISA dictates how the plan is governed and administered. Skipping documentation might feel harmless in year one—but during a DOL audit, it won’t be.

Strategic Plan Design Using Section 213(d)

One of the most overlooked advantages of Section 213(d) is strategic flexibility. Employers aren’t locked into an all-or-nothing model.

Premium-Only vs. Comprehensive Reimbursement

Employers offering ICHRA can choose to reimburse:

• Insurance premiums only
• Premiums plus all eligible Section 213(d) expenses
• Premiums plus a limited subset of expenses

Why would you limit reimbursements?

Budget control.

For example:

• A startup might reimburse premiums only to keep costs predictable.
• A professional services firm competing for talent may include dental, vision, and out-of-pocket costs to enhance perceived value.
• A company with high-deductible plan users may emphasize deductible and coinsurance reimbursements.

The definition under Section 213(d) is broad—but employers still control plan design within that framework.

Differentiating by Employee Classes

ICHRA regulations allow employers to create employee classes, such as:

• Full-time vs. part-time
• Salaried vs. hourly
• Geographic location
• Seasonal employees

Each class can receive a different monthly allowance, as long as rules are applied consistently and meet minimum class size requirements under federal regulations.

Section 213(d) governs what’s eligible for reimbursement. ICHRA class rules govern who receives what amount.

Done properly, this creates cost predictability without sacrificing flexibility.

Payroll and Tax Reporting Considerations

From a tax reporting standpoint, reimbursements for qualified Section 213(d) expenses are generally excluded from:

• Federal income tax
• Social Security and Medicare taxes (FICA)
• Federal unemployment taxes (FUTA)

However, employers must still:

• Track reimbursements accurately
• Ensure no double-dipping occurs (for example, an employee cannot both deduct a medical expense on their personal tax return and receive a tax-free reimbursement for the same expense)

Reimbursements are typically not reported as taxable wages on Form W-2 when properly administered under an HRA.

If you’re reimbursing manually through payroll without a structured HRA, those payments could become taxable compensation. That’s where many well-intentioned businesses unintentionally create compliance exposure.

Section 213(d) and Dependent Eligibility

Another area that deserves attention is dependent eligibility.

Under Section 213(d), reimbursable medical expenses may include those for:

• The employee
• The employee’s spouse
• The employee’s tax dependents (as defined under Internal Revenue Code Section 152, with certain modifications)

This means an employee can submit eligible expenses for their child, even if the child isn’t covered under the same insurance policy—provided the child qualifies as a dependent under IRS rules.

However, domestic partners who are not tax dependents generally do not qualify unless they meet IRS dependency tests.

For HR managers, this distinction matters. Plan documents must clearly define whose expenses are eligible. Ambiguity invites disputes—and potentially inconsistent administration.

Substantiation and Privacy Considerations

HIPAA and Medical Information

When employees submit documentation for Section 213(d) expenses, they’re often providing sensitive medical information. That triggers privacy considerations under HIPAA.

Employers should avoid directly handling detailed medical diagnoses whenever possible. Best practice includes:

• Using a third-party administrator
• Limiting access to protected health information
• Retaining only necessary documentation

Even small businesses are expected to handle medical data responsibly. “We didn’t know” won’t hold much weight if there’s a complaint.

Audit Preparedness

The IRS has the authority to audit employer health benefit plans. During an audit, they may request:

• Plan documents
• Reimbursement records
• Proof of substantiation
• Evidence of MEC verification for ICHRA participants

Having organized, audit-ready records reduces stress significantly. It’s one thing to say you followed Section 213(d). It’s another to prove it.

Trends Shaping Section 213(d) Reimbursements

Health benefits aren’t static. Over the past several years, Congress and the IRS have expanded what qualifies as reimbursable.

For example:

• The CARES Act of 2020 permanently allowed over-the-counter medications to qualify without a prescription.
• Menstrual care products were explicitly added as eligible medical expenses.

These updates reflect evolving healthcare norms. Employers should periodically review IRS Publication 502 and legislative updates to ensure plan documents align with current law.

Ignoring changes can result in outdated restrictions—or unintended over-permissiveness.

Practical Scenarios for Small Businesses

Let’s make this real.

Scenario 1: A 12-person marketing agency wants predictable benefits costs.
They set a fixed monthly ICHRA allowance and reimburse only premiums. Because premiums qualify under Section 213(d), reimbursements remain tax-free and budget-controlled.

Scenario 2: A 25-person construction company has employees with high deductibles.
They include deductibles and prescription costs as eligible expenses. This improves morale and retention without moving to an expensive group plan.

Scenario 3: A tech startup with remote workers across three states.
Instead of navigating multi-state group insurance compliance, they use ICHRA. Section 213(d) allows reimbursement of each employee’s individual plan, regardless of location.

Different industries. Different strategies. Same underlying tax framework.

Final Thoughts: Making Section 213(d) Work for You

Section 213(d) is the backbone of tax-free medical reimbursements. It defines what qualifies, protects the tax advantages for employers and employees, and sets the boundaries for compliant HRA design. But understanding the definition isn’t enough—you need proper plan documents, substantiation processes, privacy safeguards, and ACA alignment to make it all work smoothly.

At SimplyHRA, we help small businesses apply Section 213(d) correctly within ICHRA and QSEHRA plans—handling documentation, compliance tracking, payroll coordination, and employee support so you don’t have to juggle tax code and federal regulations on your own. If you’re ready to structure your health benefits the right way, email info@simplyhra.com or schedule a consultation at https://www.simplyhra.com/contact. Let’s build a compliant, flexible health benefits experience your team will truly value.

Frequently Asked Questions (FAQs) about Section 213(d):

Q: Can Section 213(d) expenses be reimbursed retroactively?

A: Yes, but only if your HRA plan document allows it and the expense was incurred during an eligible coverage period. “Incurred” means the date the medical service was provided—not when the bill was paid. For example, if your plan started January 1 and an employee had a doctor’s visit in February but didn’t submit the receipt until April, it can typically still be reimbursed. However, expenses incurred before the employee became eligible under the plan generally cannot be reimbursed tax-free.

Q: Does Section 213(d) include telehealth and virtual care services?

A: In most cases, yes. Telehealth visits that involve diagnosis, treatment, or prevention of disease typically qualify as medical care under Section 213(d). This includes virtual mental health counseling and online primary care visits. The key is that the service must be medical in nature—not general wellness coaching or life coaching without a medical component.

Q: Are fertility treatments considered eligible under Section 213(d)?

A: Many fertility-related treatments are eligible, including diagnostic procedures, certain assisted reproductive technologies, and related prescription medications. However, eligibility can depend on the nature of the treatment and whether it is considered medical care under IRS standards. Surrogacy expenses, for example, are generally not reimbursable under current IRS interpretations. Employers should review IRS Publication 502 and consult plan documentation when designing coverage.

Q: Can employees use Section 213(d) funds for medical expenses incurred outside the United States?

A: Potentially, yes. The IRS does not automatically exclude foreign medical care from qualifying under Section 213(d). If the expense would qualify as medical care under U.S. standards and is properly substantiated, it may be reimbursable. However, the expense must still meet plan rules, and currency conversion documentation should be retained for recordkeeping purposes.

Q: How does Section 213(d) treat medical expenses for adult children?

A: Medical expenses for an adult child may be reimbursable if the child qualifies as the employee’s tax dependent under IRS rules, even if the child is over age 26. This is different from health insurance eligibility rules under the ACA, which allow coverage of children up to age 26 regardless of tax dependency. For reimbursement purposes, dependency status matters.

Q: Are medical marijuana expenses eligible under Section 213(d)?

A: Generally, no. Although some states permit medical marijuana, it remains illegal at the federal level. Because Section 213(d) is part of federal tax law, expenses for marijuana are typically not considered qualified medical expenses for federal tax-free reimbursement purposes, even if prescribed under state law.

Q: Can an employer restrict certain Section 213(d) expenses even if the IRS allows them?

A: Yes. Employers have discretion to design their HRA plan to reimburse all eligible Section 213(d) expenses or only a subset. For example, an employer may choose to reimburse premiums and prescriptions but exclude certain categories like alternative therapies. The limitation must be clearly defined in the written plan document and applied consistently to avoid discrimination issues.

Q: What happens if an employee mistakenly receives reimbursement for a non-Section 213(d) expense?

A: If identified promptly, the employer should work with their administrator to correct the error. This may involve requiring repayment of the improper reimbursement or reclassifying the amount as taxable wages. Leaving the mistake uncorrected could jeopardize the tax-advantaged status of the plan. Timely correction and proper documentation are critical.

Q: Does Section 213(d) change from year to year?

A: The statutory language of Section 213(d) rarely changes, but Congress can amend it, and the IRS can issue updated guidance that affects interpretation. Legislative updates—such as those enacted under the CARES Act—can expand or clarify what qualifies. Employers should periodically review IRS publications and Treasury guidance to ensure ongoing compliance.

Q: Is there a dollar limit on Section 213(d) expenses?

A: Section 213(d) itself does not impose a reimbursement limit. However, limits may apply under the specific type of account being used. For example, FSAs and HSAs have annual statutory contribution limits set by the IRS. HRAs, including ICHRA, do not have a federal maximum contribution cap, but employers set their own allowance amounts. The structure of the plan—not Section 213(d)—determines the cap.

Q: Can cosmetic procedures ever qualify under Section 213(d)?

A: Generally, cosmetic procedures are not eligible if they are performed solely to improve appearance. However, if a procedure is necessary to correct a deformity arising from a congenital abnormality, personal injury, or disfiguring disease, it may qualify. For example, reconstructive surgery after an accident or mastectomy is typically eligible. The determining factor is medical necessity, not aesthetics.

Q: Are lodging and meals related to medical care reimbursable under Section 213(d)?

A: Lodging primarily for and essential to medical care may qualify, but it’s subject to strict limits. The IRS allows up to $50 per night per individual for lodging when traveling for medical treatment, provided certain conditions are met. Meals generally do not qualify unless they are part of inpatient hospital care. Proper documentation is critical in these situations.

Q: Can employees be reimbursed for medical insurance premiums paid with pre-tax payroll deductions?

A: No. If premiums are already paid on a pre-tax basis through a Section 125 cafeteria plan, they cannot also be reimbursed tax-free under an HRA. That would be considered double tax benefit treatment, which the IRS prohibits. Employers must coordinate benefit programs carefully to avoid this issue.

Q: Do concierge medical memberships qualify under Section 213(d)?

A: It depends on how the membership fee is structured. If the fee covers specific medical services such as examinations, diagnostic testing, or treatment, those portions may qualify. However, if the fee is primarily for access, administrative services, or non-medical perks, it may not qualify. Employers should request detailed invoices separating medical services from access fees.

Q: Are genetic testing services eligible medical expenses?

A: Genetic testing can qualify if it is used for diagnosing or assessing a medical condition. For example, testing ordered by a physician to evaluate cancer risk may be eligible. However, direct-to-consumer genetic testing used for general ancestry research or informational purposes is generally not considered medical care under Section 213(d).

Q: Can employees submit estimates or quotes for reimbursement?

A: No. Reimbursements must be based on services that have already been incurred. An estimate or treatment plan does not meet IRS substantiation requirements. Documentation must show that the service was actually provided and the amount charged.

Q: Are service animals and related expenses eligible?

A: Yes, in many cases. The cost of purchasing, training, and maintaining a service animal may qualify if the animal is primarily for medical care—for example, a guide dog for a visually impaired individual. Ongoing expenses such as food and veterinary care may also qualify if directly related to the animal’s medical function.

Q: How does Section 213(d) apply to smoking cessation programs?

A: Smoking cessation programs and prescribed medications designed to alleviate nicotine withdrawal typically qualify as medical care. However, over-the-counter nicotine gum or patches only qualify if permitted under current IRS rules, which have evolved in recent years. Employers should confirm eligibility based on the latest IRS guidance.

Q: Are amounts paid through medical financing arrangements eligible?

A: Yes, but timing matters. An expense is considered incurred when the medical care is provided, not when the financing is paid off. If an employee finances a dental procedure, the full eligible expense can generally be reimbursed once incurred, provided it falls within the plan year and complies with plan rules.

Q: Can employers require additional documentation beyond what the IRS mandates?

A: Employers can establish reasonable substantiation procedures in their plan documents, as long as they are applied consistently and do not violate ERISA or nondiscrimination rules. For example, a plan may require itemized receipts rather than credit card statements. Clear communication is essential so employees understand what is required upfront.

Making Section 213(d) Simple, Compliant, and Stress-Free

Section 213(d) is the backbone of tax-free medical reimbursements—but let’s be honest, navigating what qualifies, how to document it, and how to stay compliant with IRS, ACA, and ERISA rules can feel overwhelming. For small businesses without in-house benefits teams, one wrong move can turn a well-intentioned health perk into a tax or compliance headache. Understanding what counts, how to substantiate expenses, and how to structure reimbursements properly isn’t optional—it’s essential.

At SimplyHRA, we’ve been in your shoes. As small business operators ourselves, we know what it’s like to juggle payroll, compliance, hiring, and growth—all while trying to offer meaningful health benefits. We’ve helped startups, family-owned businesses, and growing teams confidently structure ICHRA and QSEHRA plans around Section 213(d) rules, automate substantiation, maintain audit-ready records, and give employees clarity about what’s reimbursable and why. The result? Predictable costs for employers, tax-free reimbursements for employees, and far fewer late-night compliance worries.

If you’re unsure whether your reimbursements meet Section 213(d) standards—or you’re ready to build a compliant, flexible health benefit that actually works for your team—let’s talk. Contact SimplyHRA at info@simplyhra.com or schedule a consultation at https://www.simplyhra.com/contact. We’ll help you design a health benefits program that’s clear, compliant, and built for real-world small business needs.