Health Savings and Flex Spending Accounts Can Support Supplements, Consumer Health

Health Savings and Flex Spending Accounts Can Support Supplements, Consumer Health
byJohn Venardos

Americasaging baby boomers are increasingly concerned about the rising cost oftraditional health care focused on disease treatment instead of healthpromotion. Employers, insurers and the federal government face staggeringsystemic health care cost increases that risk the economic and fiscal health ofthis nation and its families.

A growing number of science-based dietary supplement andnutrition products companies are working with Congress to address this periloussituation. Together, we are advancing legislation aimed at improving consumershealth care options. Specifically, a coalition including the American HerbalProducts Association (AHPA); Bayer Consumer Healthcare; Cargill; the Coalitionto Preserve DSHEA; the Council for Responsible Nutrition (CRN); GNC; HerbalifeInternational; the National Nutritional Foods Association (NNFA); Natrol;Pharmavite; the Solae Co.; and others is working with Rep. Chris Cannon (R-Utah) and abi-partisan group of lawmakers to introduce legislation promoting tax parity forcertain meal replacement products and dietary supplements under Health SavingsAccounts (HSAs) and Flexible Spending Accounts (FSAs). As drafted, the billwould require the Internal Revenue Service (IRS) to treat certain mealreplacement products and dietary supplements as deductible medical careexpenses under the Internal Revenue Code (IRC).

Dietary supplements that would qualify for the deductioninclude those that are eligible for a health claim approved by the Food and DrugAdministration (FDA). Meal replacement products that would qualify for thededuction include items that are intended to promote weight loss, are eligiblefor an FDA-approved health claim, are low in fat, and represent a good source ofprotein, fiber, and multiple essential vitamins and minerals.

Such legislation would represent an important step forward inour nations efforts to encourage individuals to consume nutritious productsand to lose weight while enjoying a healthy lifestyle. That is why thelegislation ties deductibility to FDA-approved health claims. (A current list ofFDA-approved claims is included in this article.)

Background on the HSA/FSA Laws

As part of the Medicare Prescription Drug, Improvement andModernization Act, Congress established HSAs in 2003. HSAs allow coveredindividuals to create tax-favored trusts that, when used in conjunction withhigh-deductible health plans, permit the reimbursement of qualified medicalexpenses as defined at § 213(d) of the IRC. Similarly, health FSAs, separatetax-preferred accounts, permit employees to seek tax-favored reimbursements formedical care expenditures as defined at § 213(d) of the IRC.

Section 213(d) of the IRC defines medical care asexpenses for the diagnosis, cure, mitigation, treatment or prevention ofdisease, or for the purpose of affecting any structure or function of the body.For purposes of FSAs, the IRS has interpreted § 213(d) expansively, divorcingthe § 213(d) definition of medical care from provisions in the sectionthat limit tax deductions for medication to prescription drugs. The taxregulations and decisions can thus interpret medical care under § 213(d)to include items that are generally accepted as falling within the categoryof medicine and drugs, regardless of whether they require a prescription, andother expenses incurred primarily for the prevention or alleviation of aphysical or mental defect or illness. (Treasury Reg. § 1.213-1(e)(1)(ii).)In so doing, the IRS recognized the important health benefits over-the-counter(OTC) drugs, such as antacids, provide to Americans.

In the past, IRS reasoned most functional foods and dietarysupplements were not generally accepted as medicine and drugs, nor intended totreat a disease, and were merely beneficial to an individuals goodhealth. Also, IRS defined diet food expenditures to be personal expenses(Revenue Ruling 2002-19; 2002-16 I.R.B. 778). These interpretations generallyprecluded the deductibility of most supplements and fortified nutritional foods.In many cases, these interpretations remain appropriate. However, in light ofFDAs approval of health claims for ingredients contained in some functionalfoods and dietary supplements, we believe the tax code should recognize thesubstantial health benefits associated with certain products that bear such anFDA-approved health claim. These products help prevent diseases in wayscomparable with OTC drugs. Additionally, some of these products also helppromote weight loss and healthier lifestyles conducive to disease prevention.The tax code should permit these products to be permissible medical expensesunder FSA and HSA rules.

It is also important to understand the differences betweenFSAs and HSAs. For some time, workers at many firms have been eligible toparticipate in FSAs. In such plans, workers make pretax contributions throughpayroll deduction (up to a cap), and covered workers may draw against them torecover permitted health care costs not covered by insurance. Compared withHSAs, FSAs have two drawbacks: funds earn no interest, and unspent funds areforfeit at the end of each year to the sponsoring company. HSAs, on the otherhand, are owned by the individual taxpayer and can be moved from one employer toanother. The balance remains the property of the taxpayer and can be investedmuch like a retirement account or other tax-preferred savings vehicle. Allexpenditures, however, must be approved medical expenses. Despite thelimitations, FSAs will not be rendered obsolete, as they permit pretax purchaseof routine health care items not now covered by HSAs.

Why Change the Legislative Code?

Prevention of Disease. Congress and FDA authorizedthe use of specific health claims for certain foods and dietary supplements (21U.S.C. § 343(r)(1)(B), § 343(r)(5)(D); 21 C.F.R. ߧ 101.14 ,101.70-101.83). Manufacturers may publish these important health messages,although the claims would normally cause their products to be regulated asdrugs. By permitting these health claims, Congress and FDA recognizenon-drug products serve important health policy goals and may sometimes be welladapted for the prevention of disease. For example, HerbalifesShapeWorks brand Formula 1 Nutritional Shake Mix (a meal replacement product)contains a significant amount of high-quality soy protein. FDA has officiallyrecognized that soy protein may reduce the risk of heart disease when includedin a diet otherwise low in saturated fat and cholesterol (21 C.F.R. §101.82).Therefore, such products should qualify as a permissible medicalexpense under the tax code because, when combined with other factors, itleads to the prevention of disease.

Link between Disease Prevention and Deductibility. AsFDA has recognized the value of meal replacements and certain supplements byapproving health claims, so U.S. tax policy should similarly recognize alimited number of these products may assist in efforts to prevent diseaseand, therefore, should be tax deductible. The proposed legislation would givestructure to the classification of products that prevent disease under thetax code, according to determinations made by the federal body charged withapproving health claims. If FDA approves a health claim for an ingredient usedin a healthy supplement or meal replacement that also promotes weight loss, thetax code should recognize that product as one constituting medical expensesunder HSA and FSA rules.

Comparability with OTCs. Meal replacements andsupplements qualifying for FDA-approved health claims and possessing otherhealthy characteristics should be provided with the same tax treatment as OTCdrugs. These products and OTC drugs, when combined with other factors, may leadto the prevention of disease. Currently, dietary supplements and mealreplacement products that bear an FDAapproved health claim are permitted tostate how the products may help reduce the risk of significant diseases, yetthese products do not receive the same tax treatment as antacids or OTCcough/cold lozenges. The tax code should not distinguish between the twocategories for purposes of deductibility. In September 2003, the IRS interpretedits regulations to permit tax deductibility of OTC drugs. The tax code andpolicy should recognize the same merits inherent in certain functional foods anddietary supplements with FDA-approved health claims.

Obesity Policy. The Department of Health and HumanServices (HHS) has sought to develop a comprehensive strategy to encouragehealthy nutrition and to fight obesity. A relatively high percentage of alldeaths in the United States is related to poor diet and physical inactivity; this percentage can be reduced. Health care costs associatedwith diabetes, cardiovascular disease, and other significant diseases mount asobesity and poor nutrition become more prevalent. But these challenges can beaddressed by diligent attention to improving nutrition and weightmanagementpractices of the populace. Establishing tax deductibility for certain productsthat promote a healthy lifestyle, weight loss or disease prevention should bepart of an important public policy initiative.

John Venardos is the vice president, worldwide regulatory& government affairs, for Herbalife International of America Inc., leading ateam of seasoned professionals who proactively represent the company withregulators and elected officials in 59 countries where the company doesbusiness. Venardos is responsible for ensuring product labeling and advertisingis compliant with each market based on scientific substantiation. He joinedHerbalife in 1997 following nine years at Pfizer, where he handled governmentand regulatory affairs for food ingredients and pharmaceuticals including thefirst application of biotechnology to be approved for use in food.

Industry members who would like more information on thelegislative coalition may contact Venardos at [email protected] or (310) 410-9600.

Current Approved FDA Health Claims for Food or SupplementProducts

Full Claims

All of these claims may have other requirements in order toqualify for the claim. The criteria provided above are for reference about thegeneral amount of the ingredient required.

Qualified Claims

All of the above qualified claims must also meet certaingeneral requirements listed in 21 CFR 101.14, with certain exceptions. Thecriteria listed above are for general reference and are not an exhaustive listof requirements to qualify for the claim.

Information about qualified claims may be found atwww.cfsan.fda.gov/~dms/lab-qhc.html.