Richard Rubin and Amy Marcus report in the Wall Street Journal:
That health portion of 23andMe’s test is medical care for tax purposes, the IRS determined. It made no ruling on ancestry testing and said taxpayers can separate the tax-advantaged piece from the bundled product.The tax law defines medical care broadly, as amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” The IRS’s guidance on medical expenses is filled with interpretations, caveats and exceptions. Breast reconstruction surgery after cancer is eligible; cosmetic surgery is disallowed. Physical therapy is eligible; gym memberships aren’t.
Buyers of 23andMe Inc.’s genetic-testing kits will now have an easier time paying for the service with tax-advantaged health accounts after a favorable IRS ruling.
The decision offers more clarity to consumers and reduces the cost of the company’s service. It also highlights differences between the tax law’s permissive definition of medical care and health regulators’ more restrictive approach to direct-to-consumer testing products.
The Internal Revenue Service made the ruling in May and will release a redacted version next month. The Wall Street Journal reviewed the document before 23andMe disclosed it Monday.
The company sells genetic tests that provide consumers with information about a variety of things, including ancestry, wellness and traits such as food-taste preferences. The health reports provide information on whether individuals have gene variants that increase their risk for developing certain diseases.
That health portion of 23andMe’s test is medical care for tax purposes, the IRS determined. It made no ruling on ancestry testing from the same saliva sample and said taxpayers can use reasonable methods to separate the tax-advantaged piece from the bundled product.
23andMe says the decision means consumers can claim up to $117.74 of the $199 cost of a health-and-ancestry kit as medical care for tax purposes and is offering a calculator to handle taxes, shipping and discounts. Jacquie Haggarty, the company’s deputy general counsel, said any 2019 purchases should be eligible expenses.
That means people with tax-advantaged flexible spending accounts or health-savings accounts for their out-of-pocket costs can use that money to purchase the kits. Genetic-testing kits could be more easily added to end-of-year shopping lists—along with perennial favorites like sunscreen and contact-lens solution—by people trying to empty their use-it-or-lose-it FSA balances. People who itemize deductible medical expenses can include these costs.Ms. Haggarty said customers asked 23andMe for assistance in using their tax-advantaged accounts for the tests, and until now, there was no clear answer.
“This ruling, I think, is wonderful in giving consumers guidance on the IRS’s thinking,” she said. The decision, which was made as a private-letter ruling, technically only applies to the person who made the request with 23andMe’s support. However, tax advisers often use such rulings as an indication of the IRS’s stance on issues.
The IRS declined to comment for this article.
Jody Dietel, chief compliance officer at WageWorks Inc., which administers FSA and HSA plans, said even without the ruling, it was approving partial reimbursement for claims when there was proper documentation of the health portion of tests.
23andMe presents its direct-to-consumer genetic tests as offering greater choices to consumers, who now have options beyond those ordered by medical professionals. In the 23andMe model, consumers buy tests, spit in a tube at home, and send the sample. They review results and reports online, then decide what to discuss with doctors.
In 2017, the Food and Drug Administration authorized 23andMe to market tests reporting genetic-risk information directly to consumers
for conditions like Parkinson’s disease, late-onset Alzheimer’s disease and celiac disease. More recently, the FDA authorized 23andMe tests reporting on three BRCA gene variants most common in people of Ashkenazi Jewish descent and a hereditary colon cancer syndrome.
The agency told consumers and professionals not to use test results to determine treatments, including antihormone therapies or the removal of breasts or ovaries. The FDA said Friday that genetic tests alone can’t determine risk of developing a disease and that information must be considered in broader context.
23andMe tests are regulated differently from clinical genetic tests, said Kathryn A. Phillips, health-economics professor and founding director of the Center for Translational and Policy Research on Personalized Medicine at the University of California, San Francisco.
“If you get a result and see a physician, they need to redo the test in a clinical lab,” she said. “In that way, it is not health testing in the normal sense.”
The tax law, however, defines medical care broadly, as amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” The IRS’s guidance on eligible medical expenses is filled with interpretations, caveats and exceptions designed to prevent people from lumping general consumption into tax-preferred categories. Breast reconstruction surgery after cancer is eligible; cosmetic surgery is specifically disallowed. Physical therapy is eligible; gym memberships aren’t.
The private-letter ruling relies on previous agency determinations that diagnostic tests of normal functioning even absent disease—such as full-body scans and pregnancy tests—are eligible medical expenses.
“The IRS, for decades, has read the term ‘disease’ extremely broadly,” said Katie Pratt, a professor at Loyola Law School in Los Angeles who studies tax treatment of medical expenses. “What matters is that there’s a serious laboratory function going on to do the genotyping.”
Othman Laraki, chief executive of Color, a Burlingame, Calif.-based health-tech company, said its physician-ordered genetic test is already considered medical care for tax purposes.
The IRS ruling, he said, may lead to an “acceleration of an already interesting dialogue” about what constitutes health services.
“I think we have a very strong opinion on that,” he said. Regarding the BRCA test report, he said, “Can you consider something a medical report if you only report on a handful of mutations versus the thousands that are actually present?”
The tax ruling for 23andMe could lead beyond genetic testing, said Marianna Dyson, a tax and benefits lawyer at Covington & Burling LLP in Washington.
What’s notable, she said, is the IRS’s willingness to let the taxpayer break out the tax-advantaged portion from the cost of a bundled consumer product. An obvious next step could be considering whether a portion of smartwatches with health apps are medical costs.
“This shows some forward thinking by the IRS with multifunctional devices, platforms, software, [about] an allocation approach that’s reasonable,” Ms. Dyson said.
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