The rules for reimbursement on over-the- counter (O-T-C) medicine and drug costs under certain employer-provided benefit plans are about to be changed due to the health care reform law enacted earlier this year. Recent IRS guidance explains how the law impacts reimbursements from flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs).

Background

Before health care reform, amounts paid for prescriptions and O-T-C medicines had been treated as medical care expenses for FSA, HRA, HSA, and MSA purposes. Thus, a plan could reimburse these expenses and the amounts would be excludable from the account owner’s gross income.

The health care reform law modifies the definition of medical expenses for purposes of employer-provided health coverage. Specifically, the cost of O-T-C medicines may not be reimbursed with excludable income through an FSA, HRA, HSA or Archer MSA unless the medicine is prescribed by a physician, or is insulin.

IRS Guidance

The IRS’s new guidance explains that an individual may be reimbursed for O-T-C medicines or drugs, only if the individual obtains a prescription for the medicine or drugs. Under the guidance, a “prescription” must meet the legal requirements for a prescription under state law and be issued by an individual who is legally authorized to write prescriptions in that state.

The new prescription-only rule does not apply to items that are not considered medicine or drugs, such as bandages, crutches, and diagnostic devices, like blood sugar test kits.

Effective Date

The changes to the rule relating to reimbursement and the corresponding tax treatment of O-T-C medicines and drugs obtained without a prescription are effective for tax years beginning after December 31, 2010. Note that purchases made in 2010 are unaffected by the new rule, even if they are reimbursed after December 31, 2010.

Substantiation

To prove that the purchase of an O-T-C medicine or drug occurred with a prescription and, therefore, qualifies for reimbursement, an individual must provide documentation. Sufficient proof includes the prescription (or a copy of it) and the customer receipt (or similar documentation) showing the name of the person obtaining the medicine or drugs, date of the sale, the prescription number and the amount of the charge.  Other rules apply. Contact us for more details.