In this post, it was reported that the IRS would be issuing guidance soon on “whether non-prescription drugs (e.g., aspirin) can be reimbursed by health FSAs, HRAs and other self-insured insured medical reimbursement plans under Code Section 105.” Yesterday, the IRS issued that guidance which you can access here in a press release and also here in Revenue Ruling 2003-102. The ruling provides that over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts (“FSA’s”) and that employer reimbursements for nonprescription drugs by an employer health plan are excluded from income. However, the ruling goes on to say that amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee are not reimbursable or excludable from gross income.
The ruling gives an example which demonstrates the advantages of the new ruling: Suppose an employee purchases an “antacid, an allergy medicine, a pain reliever, and a cold medicine from a pharmacy.” None of the items are purchased with a physician’s prescription and are purchased for personal use–to alleviate or treat personal injuries or sickness. The employee also purchases dietary supplements (e.g., vitamins) without a physician’s prescription to maintain the general health of the employee. The employee submits substantiated claims for all of these expenses, which have been incurred during the current plan year, to his employer’s health FSA for reimbursement.
Under the ruling, the “antacid, allergy medicine, pain reliever, and cold medicine” would be reimbursable by the FSA and excludable from income. However, the dietary supplements would not be reimbursable or excludable from income.
Comment: Please note that Revenue Ruling 2003-102 distinguishes Revenue Ruling 2003-58 which had held that non-prescription drugs were not deductible under section 213 of the Internal Revenue Code (the “Code). The reason that non-prescription drugs were not deductible under section 213 is that section 213(b) only permits an amount paid for a medicine or drug to be deductible if the medicine or drug is a prescribed drug or insulin. The IRS contrasts section 105(b) (which governs FSA’s) as only requiring that expenses be incurred “by the taxpayer for . . . medical care,” i.e. there is no requirement that the medicine or drug be prescribed or that such expenses must qualify for the deduction for medical care under Code section 213.
Additional Comment: The changes brought about by this new ruling may not automatically apply. An employer may have to amend its plan documents governing the FSA before implementing the changes brought about by the ruling. However, some plan documents may state that participants are permitted to seek reimbursement for any expense the IRS allows in which case the plan document would not have to be amended. Employers will want to have their plan documents reviewed by an attorney to determine if the plan needs to be amended. In addition, some employers may want to look into the cost of implementing the change due to the paperwork involved for the substantiation of these charges.
SFGate.com has a great article on the ruling: “Feds approve using pretax cash for OTC drugs.” The article quotes Treasury spokeswoman Tara Bradshaw as saying that treatments for acne such as Clearasil would qualify for reimbursement, even though the wording of the ruling is not “clear” on the subject.
The Wall Street Journal also reports: “OTC Drugs Can Be Purchased With Tax-Advantaged Savings.” (Subscription required.)