One of the provisions of the Patient Protection and Affordable Care Act (PPACA) is the elimination of over-the-counter medicines as eligible expenses that can be paid for tax-free through a Flexible Spending Account (FSA), Health Reimbursement Account (HRA), or Health Savings Account (HSA). The addition of over-the-counter medicine to the list of tax free medical items was added back in 2003. So the rules are simply reverting to how they were eight years ago.
Beginning January 1, 2011, FSA participants will need to be more careful in estimating their annual election amount. With the “use it or lose it” rule, there may be a greater chance of “losing” instead of “using” the money since they won’t have the option to use up any FSA balance by going to the pharmacy and buying seven boxes of sinus medicine at the end of the year.
There will be a couple of exceptions to the new OTC rules.
1) Insulin for diabetics that is currently purchased over-the-counter can still be purchased tax free with an FSA.
2) If you have a doctor’s prescription for a specific over-the-counter medicine, you can continue to use your FSA/HSA to purchase this medicine. If your FSA provider offers you a debit card, you most likely will not be able to use your debit card to pay for this. Instead, you will need to request reimbursement from your FSA provider. Your FSA provider will ask you for a copy of the doctor’s prescription and a letter of medical necessity.
So there are ways to still pay for OTC medicine with your FSA, but your doctor must agree that you need it for medical purposes. HSA participants must also keep their doctor’s documentation on file, in case of a personal IRS audit.
The IRS has yet to come out with the specific list of what will be excluded beginning next year, but the general rule is any over-the-counter medicines used to treat an ailment will no longer be an eligible item. Examples would be medicines for allergies, sinus and colds, digestive ailments, and pain relievers. Other medical supplies, such as bandages and thermometers, are still eligible expenses.
Two other changes made by the PPACA affecting tax free accounts:
HSA’s: Beginning January 1, 2011, the tax penalty for HSA funds spent on non-approved medical expenses will increase from 10% to 20%. So you’ll want to think twice before using your HSA money to buy that large screen TV. This penalty is reported to the IRS at the time you file your income taxes.
FSA’s: Beginning January 1, 2013, employees can only elect up to $2500.00 per year. While this limit may not affect those who usually don’t elect that much, it will affect those who put away higher amounts for orthodontia and other upcoming big ticket medical expenses. Currently, there is no IRS imposed limit on the amount of money you can elect to contribute to an FSA. The employer has the option to set their own limit for their employees, since the employer takes the risk of paying out the entire amount if the employee leaves mid-year, and is not able to recoup the rest of the money through payroll deductions.