Employer Reimbursement and Deduction Options for Out-of-Pocket Medical Expenses Related to COVID-19

Find out your options if you end up with out-of-pocket medical expenses due to COVID-19.

By , J.D. · USC Gould School of Law

Congress has stepped in to help with medical costs related to coronavirus (COVID-19). Federal legislation provides that all testing will be done for free and treatment should be covered by health insurance policies or Medicaid. Nevertheless, people could still end up with out-of-pocket expenses due to high deductibles or unreimbursed expenses under their health insurance plans. If you end up in that situation, you have options, including asking your employer to reimburse you under special federal disaster relief legislation or deducting the expenses yourself (although there are significant limitations on this option).

Health Insurance Coverage and Medicaid

The cost of treating people who contract COVID-19 is substantial. Depending on the severity of the illness, the cost can run anywhere from $10,000 to $75,000 or more. If you have health insurance, it should cover your treatment for the coronavirus. However, depending on your plan, you could still have to pay deductibles and/or copayments. For some plans, these can be quite high.

Fortunately, many private health insurers have elected to cover all costs of coronavirus treatment and are waiving patient cost sharing. A handful of states are even requiring such waivers. Check with your health insurer to find out what it's doing. You can also find summaries of health insurer coronavirus treatment policies throughout the country at Health Insurance Providers Respond to Coronavirus. Keep in mind, however, that such cost sharing waivers may only apply to treatment within the insurer's network. You may still have to pay for out-of-network care.

If you're covered by state Medicaid, it should pay for your coronavirus treatment as well as testing. The federal government has also announced that it will reimburse hospitals for treating uninsured Americans for coronavirus. However, all the details have yet to be worked out. Uninsured individuals could still be billed for outpatient treatment or other services not directly billed by hospitals.

How to Pay Out-of-Pocket Expenses

If you end up being billed for coronavirus treatment not covered by insurance or reimbursed by the government, you have two options.

Employer Reimbursement for Out-of-Pocket Expenses

Your best option is to try to get your employer to reimburse you for your out-of-pocket coronavirus treatment expenses. Your employer may do this even if it has no formal health reimbursement plan. Because the coronavirus pandemic has been declared a national emergency, employers are allowed to make qualified disaster relief payments to their employees under a provision of the tax law called Section 139.

This tax law allows employers to reimburse or pay employees for reasonable and necessary personal, family, living, or funeral expenses they incur due to the pandemic emergency. This includes uninsured and unreimbursed medical expenses, including co-pays, deductibles, prescription and over-the-counter medications for coronavirus treatment. Such payments are tax-free to the employee and tax deductible by the employer.

Of course, you must have an employer willing to reimburse you for such uncovered out-of-pocket costs. It is not obligated to do so.

Deducting Unreimbursed Medical Expenses

You can always deduct unreimbursed medical expenses. These include all medical, dental, and other health-related expenses not just expenses for coronavirus treatment. However, there are two big impediments to taking this deduction:

First, you may deduct your medical, dental, and other health expenses only if, and to the extent, they exceed 7.5% of your adjusted gross income for the year. (Your AGI is your total taxable income, minus deductions for retirement contributions and one-half of your self-employment taxes (if any), plus a few other items.) Thus, for example, if your AGI is $100,000, you may deduct your medical expenses only if, and to the extent, they exceed $7,500.

Second, medical expenses are a personal expense that you may deduct only if you itemize your personal deductions on IRS Schedule A. You should itemize only if all your personal deductions, including medical expenses, exceed the standard deduction. The Tax Cuts and Jobs Act (TCJA), which went into effect in 2018, roughly doubled the standard deduction. For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for marrieds filing jointly. At the same time, the TCJA eliminated or curtailed many valuable itemized deductions. The result is that only 10% of taxpayers now itemize their deductions, down from 30% pre-TCJA. However, if your medical expenses are quite high, they may easily exceed the applicable standard deduction and you'll be able to itemize to deduct them.

Coronavirus Testing

Coronavirus (COVID-19) testing is free for everyone. The Families First Coronavirus Response (FFCRA) Act, and the Coronavirus Aid Relief and Economic Security (CARES) Act require that both group and individual health plans cover diagnostic testing for the coronavirus as well as certain related services provided during a medical visit without any cost sharing. These include:

  • urgent care visits
  • emergency department visits, and
  • in-person or telehealth doctor's office visits.

But note that such visits are covered without cost sharing only if they result in a COVID-19 test.

Covered testing includes all FDA-approved COVID-19 tests, unapproved tests authorized on an emergency basis, and tests developed and authorized by states. Antibody testing will also be covered.

COVID-19 testing is also covered without cost sharing for people covered by Medicaid. The states also have the option of using Medicaid to cover testing for uninsured people and those with substandard health plans like short-term policies.

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