The FSA/HRA/HSA Double Dipping Prohibition and OTC Covid-19 Tests

Question: What’s the problem with employees using their health FSA, HRA, or HSA to pay for OTC Covid-19 tests?

Short Answer: The IRS has a blanket rule prohibiting individuals from “double dipping” with account-based plans that prevents using the account for expenses reimbursed by the health plan.  Now that OTC Covid tests are generally covered by the health plan, employees will need to be careful to avoid double dipping with their health FSA, HRA, or HSA.

In 1993, Seinfeld’s “The Implant” episode confirmed to the world that proper etiquette demands avoiding double dipping—in that case with chips.  Fast forward nearly three decades later, and there’s a newly fashionable form of double dipping to publicly rebuke—in this case with sharing COVID-19 tests among multiple family members.

But the IRS has been anti-double dipping since way before it was cool to call out contaminating the chip dip or “internasal promiscuity” with COVID-19 (“Covid”) tests.  The longstanding FSA/HRA/HSA account-based health plan double dipping prohibition has emerged again with new significance given the recent expansion of the FFCRA/CARES Act mandates to include the requirement that health plans cover over-the-counter (“OTC”) Covid tests without cost-sharing.


General Rule: OTC Covid Tests Covered Without Cost Sharing

As of January 15, 2022, health plans must cover OTC Covid tests without cost-sharing, prior authorization, or other medical management requirements for the duration of the public health emergency.

This expansion of the free Covid testing coverage mandate permits covered individuals to obtain at least eight OTC Covid tests per month paid for or reimbursed by the health plan.  No doctor’s order or involvement with any health care provider is required for participants to access the free OTC Covid tests.

Plans are encouraged to provide direct coverage for OTC tests to avoid the need for participants to pay up front and seek reimbursement.  However, plans are permitted to require that participants pay up front and submit a claim with the receipt for reimbursement.


General Rule: OTC Covid Tests Are Eligible FSA/HRA/HSA Expense

Prior to the expansion of the health plan free testing mandate to include OTC Covid tests, the IRS issued a reminder that at-home testing expenses are eligible expenses under a health FSA, HRA, or HSA.  The guidance confirmed that Covid testing is an eligible expense because the cost to diagnose Covid is a Section 213(d) medical expense.

Furthermore, the IRS previously issued guidance that personal protective equipment (PPE) such as masks, hand sanitizer, and sanitizing wipes for the primary purpose of stopping the spread of Covid are also Section 213(d) expenses eligible for reimbursement under an FSA/HRA/HSA.


Double Dipping Prohibition: Can’t Use FSA/HRA/HSA for Expense Reimbursed by Health Plan

The IRS imposes a blanket prohibition against using any account-based health plan for an expense that has been reimbursed from another health plan.  The guidance stems from Section 105, Section 125, Section 213, Section 223, as well as IRS Notices, Information Letters, and Publications (a sampling is copied at the end of this post for reference).

The prohibition also extends to tax deductions.  Individuals who have an expense reimbursed by a health plan (whether account-based or traditional) cannot claim that same expense as a deduction on their tax return. Finally, the OTC Covid test coverage mandate guidance provides that health plans can require participants to attest that their test expenses submitted for reimbursement by the health plan have not been (and will not be) reimbursed by another source. The practical result is that any expense reimbursed by the health plan cannot be reimbursed from the health FSA, HRA, or HSA.  Using both the account-based plan and the health plan to reimburse an expense is the classic prohibited form of double dipping. For example, the IRS has stated that a health FSA must require the participants submitting a claim to certify that the expense has not already been reimbursed by any other plan, and the employee will not seek reimbursement from any other health plan. Failure to follow these double dipping prohibitions could result in employees losing the preferred tax treatment for the expense and, at least in theory, the employer’s entire health FSA or HRA plan losing their tax-qualified status.


Double Dipping Prohibition: The Covid OTC Test Trap

Two things can be equally true:

  • Employees can use their FSA/HRA/HSA to reimburse their OTC Covid test expenses; and

  • Employees should not use their FSA/HRA/HSA to reimburse their OTC Covid test expenses.

Employees are far better served by using their health plan to cover their OTC Covid test costs than using funds from their account-based plan to pay for such expenses.  The health plan coverage imposes no cost-sharing (i.e., free to the employee), whereas using the FSA/HRA/HSA would deplete funds that could otherwise be used for other qualifying medical expenses.

And a reminder: No double dipping!  Employees cannot use their FSA/HRA/HSA to reimburse OTC Covid test expenses that are being reimbursed by the health plan.


Double Dipping Prohibition: The FSA/HRA/HSA Covid OTC Test Temptation

Health plans are not required to provide direct coverage for OTC Covid tests.  Furthermore, even health plans providing direct coverage will do so only at preferred pharmacy or retailers.  The result is that in many cases employees will be required to pay up front and submit a claim with the receipt to the health plan for reimbursement.

For example, assume an employee covered by the employer’s major medical plan is purchasing eight OTC Covid tests outside the health plan’s preferred pharmacy/retail network that offers direct coverage because the out-of-network approach is more convenient or there is better supply available.  Each test costs $12.  In that case, the employee would need to pay $96 up front to buy the tests.  Also assume that the employee is enrolled in the employer’s health FSA with a $250 election.  The employee may be tempted to use the health FSA debit card to cover the cost of those expenses to avoid the need to pay with cash or another source.  Under the uniform election rule, the employees have full access to their health FSA election balance regardless of year-to-date contributions.

However, if the employee uses the health FSA to pay for the upfront costs of purchasing the OTC Covid tests, the employee is ultimately in a worse position.  The employee is then not able to submit the $96 expense to the health plan (which could have been reimbursed in full) because double dipping is prohibited.  Furthermore, the employee’s health FSA balance is reduced to $154 - which could have remained at $250 for other expenses had the employee used the health plan to cover the test costs. Of course, using the health plan is not without its downsides. The employee in this example will have to pay for the OTC Covid tests up front and seek reimbursement post-purchase.  The interim period waiting for the plan’s reimbursement can cause financial hardships.  However, overall, employees are clearly better served using their health plan to cover the OTC Covid test costs when available.


Exception: When Using the FSA/HRA/HSA for OTC Covid Test Expenses Makes Sense

Using the FSA/HRA/HSA to pay for OTC expenses not covered by the health plan is not double dipping and is an appropriate use of the account-based plan.

For example, assume the employee’s health plan uses the safe harbor to cap reimbursement of OTC Covid tests purchased outside the direct coverage network of preferred pharmacies or retailers at $12 per test.  The employee goes outside the preferred network to purchase eight OTC Covid at a cost of $15 per test, for a total of $120. In that case, the employee could submit $96 to health plan for reimbursement.  The employee could use an FSA/HRA/HSA to pay for the remaining $24 not covered by the health plan on a tax-advantaged basis.  None of the expense will be covered by more than one plan, and therefore no double dipping violation will occur.

The same would be true if the employee purchased more than eight OTC Covid tests in a month.  For example, assume an employee enrolled in employee-only health plan coverage purchased 10 OTC Covid tests in one month.  The employee could use an FSA/HRA/HSA to pay on a tax-advantaged basis for the two excess tests not covered by the health plan without creating a double dipping issue.


Summary: A New Anti-Double Dipping Reminder Opportunity

Employees generally do not have situations where they must submit expenses for reimbursement from their major medical plan.  In almost all cases, health expenses covered by the major medical plan are handled through direct coverage. That is, the plan directly pays the provider for its share, and the employee is responsible for paying the provider for the cost-sharing amount (deductible, copay, coinsurance). Under the direct coverage approach for virtually all major medical plan payments, double dipping is far less of a concern for employees because the employee does not pay up front and wait for reimbursement.

The new OTC Covid test coverage mandate creates a rare moment where large segments of participants will be engaging in paying up front and seeking reimbursement post-purchase from the medical plan.  This should accordingly create a communication priority for employers to ensure employees are aware of the IRS double dipping prohibition to avoid using an FSA/HRA/HSA for OTC Covid test expenses covered by the health plan.



IRC §105(h)(6):

(6) Self-insured medical reimbursement plan.

The term “self-insured medical reimbursement plan” means a plan of an employer to reimburse employees for expenses referred to in subsection (b) for which reimbursement is not provided under a policy of accident and health insurance.


IRC §105(b):

(b) Amounts expended for medical care.

Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, his dependents (as defined in section 152 , determined without regard to subsections (b)(1) , (b)(2) , and (d)(1)(B) thereof), and any child (as defined in section 152(f)(1) ) of the taxpayer who as of the end of the taxable year has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection.


IRC §213(a):

(a) Allowance of deduction.

There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.


Treas. Reg. §1.213-1(a)(3)(i):

(i) For medical expenses paid (including expenses paid for medicine and drugs) to be deductible, they must be for medical care of the taxpayer, his spouse, or a dependent of the taxpayer and not be compensated for by insurance or otherwise. Expenses paid for the medical care of a dependent, as defined in section 152 and the regulations thereunder, are deductible under this section even though the dependent has gross income equal to or in excess of the amount determined pursuant to §1.151-2 applicable to the calendar year in which the taxable year of the taxpayer begins. Where such expenses are paid by two or more persons and the conditions of section 152 (c) and the regulations thereunder are met, the medical expenses are deductible only by the person designated in the multiple support agreement filed by such persons and such deduction is limited to the amount of medical expenses paid by such person.

** **

IRS Information Letter 2016-0048:

View letter here.

In addition, the employee must certify that any expense being reimbursed has not already been reimbursed and the employee will not seek reimbursement from any other health benefit plan.


IRS Notice 2004-2:

View statement here.

Q-26. What are the “qualified medical expenses” that are eligible for tax-free distributions?

A-26. The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213.

** **

IRS Publication 969:

View publication here.


Recordkeeping. You must keep records sufficient to show that:.

  • The distributions were exclusively to pay or reimburse qualified medical expenses,

  • The qualified medical expenses hadn’t been previously paid or reimbursed from another source, and

  • The medical expenses hadn’t been taken as an itemized deduction in any year.


[Health FSA:]

You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense hasn’t been paid or reimbursed under any other health plan coverage. The FSA can’t make advance reimbursements of future or projected expenses.



Qualified medical expenses from your HRA include the following.

  • Amounts paid for health insurance premiums.

  • Amounts paid for long-term care coverage.

  • Amounts that aren’t covered under another health plan.

Brian Gilmore
The Author
Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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