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?
Ok, so I get this ruling and I believe I’ve complied with this anyway under my HSA. But I have a question for which I’ve never known the answer. I pay for my contact lenses with my HSA funds. But could I also pay for my contact lense solution/cleaning supplies, etc. with HSA funds? It was always too difficult in the past for this to be an issue (I never used HSA funds before to purchase these items), but now I have a HSA Debit Card and wonder if I can’t start purchasing my contact supplies with those funds.
What a great resource!
While researching this topic I came accross a press release from the US Department of Treasury in 2003. Looks like that’s when they decided to allow non-prescription drugs to be deductable through FSA’s. From the release:
“Flexible Spending Accounts are an important tool in helping people meet their health care costs,” stated Treasury Secretary John Snow. “Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow.”
“Flexible Spending Accounts were established under the tax code to provide incentives for better health care,” said IRS Commissioner Mark W. Everson. “This action is a sensible expansion and simplification of the program consistent with existing law.”
I guess they changed their minds.
Under the new law, at Section 9003, the law is “conformed” to the definition for purposes of medical expenses at IRC §213.
Interesting that this is going back to the way it was in 1985
I recently became aware of this clause in the Affordable Healthcare Act and would like to share these thoughts:
This change significantly decreases the value of having a FSA (and maybe that’s the intent). First of all, no one goes to their doctor to get prescriptions for OTC medications…because they are OTC meds, hence don’t require prescriptions! Doesn’t that nullify the value of making a drug OTC?
The ability to pay for OTC meds with FSA funds helps safeguard against
the risk inherent with FSAs since they are use-it-or-lose-it. If we do not use all the funds (to which we contribute out of our own pocket), then we lose that money. Each year participants must estimate medical expenses and plan how much money to contribute; however estimates rarely reflect actuals. In years when actual expenses were less than what was allocated to the FSA, participants were able to purchase OTC meds as a method to reduce or eliminate losing unused funds. The IRS rule change now unfairly removes this ability.
The government cannot not have it both ways; FSA programs that are use-it or lose-it and imposing unfair restrictions on how participants may use their own money to pay for legitimate medical expenses.