Over The Counter Drugs May Now Be Reimbursed By Health FSA’s, HRA’s and Other Employer Provided Health Plan

A new Revenue Ruling now states that “reimbursements by an employer for amounts paid by an employee for medicines and drugs purchased by the employee without a physician’s prescriptions are excludable from gross income” under Code Section 105 (b). The Revenue Ruling does not permit the reimbursement of dietary supplements (e.g., vitamins) that are “merely beneficial to the general health” of an employee or the employee’s spouse or dependents.

The Revenue Ruling focuses on Code Section 105 (b), which is the basis for tax-free treatment of amounts received from employer-provided accident and health plans (which includes Health FSA’s and HRA’s). However, Section 213 (b) clearly denies deductions for over the counter drugs. The Revenue Ruling goes on to address the role of Code Section 213 (b) and Code Section 105 (b). The IRS finds that “there is no requirement in [Section] 105 (b) that the expenses be allowed as a deduction for medical care under [Section] 213 (a) or that only medicines or drugs that require a physician’s prescription be taken into account. Accordingly, the amount expended by [the employee] to purchase the antacid, allergy medicine, pain reliever and cold medicine without a physician’s prescription is an expenditure for medical care.”

The Ruling does not specify an effective date. Whether your plan may offer over the counter items as eligible reimbursable expenses depends on how your plan document is drafted. If Taxsaver Plan drafted your plan document, you will not need to amend the document to allow for over the counter items. You will need to contact Taxsaver Plan to notify us of the date that you would like to allow over the counter items as reimbursable expenses. We will not accept receipts from participants unless directed by you, the Plan Sponsor. If you did not have Taxsaver Plan draft the Cafeteria Plan Document, you may send it to us for review. If the document requires amending, you may only allow for over the counters as reimbursable expenses prospectively. If the document allows for over the counter items as reimbursable expenses, you may allow for these expenses to be reimbursed retroactively as far back as January 1, 2003. Regardless of how the current plan document reads, this does not constitute a mid-year election change.

Adequate claim substantiation of the over the counter items will be required. This means that all receipts for over the counter items must include the name of the drug or item purchased and the date that it was purchased from the store. A copy of the label attached to a register receipt will not be accepted. If your plan offers the debit card for Health FSA’s, participants will always be required to submit receipts to substantiate the debit card swipe for over the counter items. It may be beneficial to instruct your participants to only use the debit card for prescription drugs and to submit over the counter items under the non-debit card reimbursement process.

The IRS has informed us that it is reasonable to reimburse participants who have purchased a reasonable quantity of over the counter drugs to have on hand, as long as the over the counter drugs otherwise qualify as medical care. We will define a reasonable quantity as quantities of 1-5 over the counter drugs purchased at one time per family.

The over the counter drug must be primarily for medical care and not be considered a cosmetic procedure. The over the counter drug must be for the diagnosis of disease, cure, mitigation, treatment or prevention of a disease or for the purpose of affecting any structure or function of the body. The over the counter drug must be more than just beneficial to general health. Some over the counter drugs have a dual purpose, serving a personal/cosmetic or general health purpose as well as a medical purpose. Such over the counter drugs will require a letter from a physician stating the medical condition or disease that the over the counter drug is treating.

The IRS will not be producing a listing of eligible over the counter drugs. Taxsaver Plan has itemized over the counter drugs and items into three categories. Please click on the links below to view the listing of Eligible Expenses that will not require a doctor’s letter, Dual Expenses, which will require a doctor’s letter and Ineligible Expenses, which are not reimbursable under any circumstances.