The health care reform bill, also known as the Patient Protection and Affordable Care Act, which was signed into law in March 2010 is massive (you can catch some of the highlights here). It’s divided into ten titles and is roughly 2,400 pages long (that’s longer than a standard King James Version of the Bible). It’s so big that practically nobody has read it all of the way through, including members of Congress. As a result, bits and pieces tucked away in the bill, like the new reporting requirement for forms 1099, have been spilling out over time and catching many taxpayers by surprise.
Yesterday, another change caught the eye of one of my readers. I received an email yesterday that said, in part:
Not sure if you knew this, but this is significant change from current law… it is significant. Having to procure a prescription for every OTC items burdens the physician office and the patient too… Sort of reduces the med benefit considerable, particularly as it pretains to OTC meds.
The email was referring to a change in the way that Flexible Spending Accounts (also known as FSAs) are handled. FSAs allow employees to use pre-tax dollars to pay for out-of-pocket costs that insurance won’t cover, such as diabetic supplies. Traditionally, this included a pretty wide range of expenses, including over the counter (OTC) medications like aspirin and ibuprofen.
Under the new law (which also imposes caps on FSAs), OTC medications are no longer eligible as FSA expenses unless a doctor writes a prescription for the medications. This is a pretty significant change from the old law but not completely unexpected. Many tax professionals found it inconsistent that FSAs would allow pre-tax dollars for expenses that would otherwise be ineligible as medical expenses under the Tax Code. Personal items and non-prescription medications are not allowed as deductions on your Schedule A as deductible medical expenses; this is not new. However, prior law allowed those medicines to be taken for purposes of FSAs.
Under the new law, at Section 9003, the law is “conformed” to the definition for purposes of medical expenses at IRC §213. The applicable language from §213 states:
(b) Limitation with respect to medicine and drugs. An amount paid during the taxable year for medicine or a drug shall be taken into account under subsection (a) only if such medicine or drug is a prescribed drug or is insulin.
The conformed definition isn’t restricted to FSAs under the new law. It also encompasses HRA, HSA or Archer MSA plans and takes effect for the 2011 calendar year.
On the one hand, the switchover makes sense. From a tax perspective, it was an inconsistent position. And statistically, only a handful of employees were using the program for OTC medications; according to a April 2010 Hewitt Associates survey, around 7% of all FSA claims in 2009 were for those OTC medications.
But I can see where it is feels disingenuous to taxpayers to have something that was previously acceptable as a legitimate expense to no longer be acceptable. And the point is well taken about the increased paperwork on the patient and physician end – efforts are already in the works to try and eliminate the doctor’s note requirement.
My gut is that, pending anything new and exciting on the health care reform front, these kind of plans may be on their way out. New caps, additional restrictions and paperwork are making them less appealing (and less beneficial) than before. What do you think?
- Taxes from A to Z: F Is For FSA
- Why A Vote on the Medical Device Excise Tax Is The Biggest Deal Ever for Obamacare
- Ask the taxgirl: Contacts, Glasses and Other Medical Expenses
- No Tax on Health Care Benefits for 2010 or 2011 or…
- Dems, GOP Suddenly Care About 1099 Reporting Requirement