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How the New Health Care Law Affects Taxes on Over the Counter Medication

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There is a provision in the new Patient Protection and Affordable Care Act that changes the taxability of over the counter medications purchased through flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs).  Basically, for HRAs and FSAs, you can no longer receive reimbursements to pay for over the counter medications.  For HSAs and MSAs, you can no longer take distributions to pay for over the counter medications.  If you do take a distribution from an HSA or MSA to pay for over the counter medications, the distribution is taxable and is subject to a 20% penalty.  These provisions became effective January 1, 2011.

ABCs of FSAs, HRAs, HSAs, and MSAs

An FSA (flexible spending account) is a savings account funded by employee pre-tax contributions.  The funds in the account can be used to pay for medical expenses on a pre-tax basis.  In some cases, FSAs may also be funded by employer contributions.  Amounts are contributed each year based on expected medical expenses.  Any amounts not spent during the year are forfeited.

An HRA (health reimbursement account) is a savings account funded by employer contributions on a pre-tax basis.  The employee is not allowed to contribute to an HRA.  The employee submits medical expenses and is reimbursed with pre-tax dollars.  Amounts not spent are carried forward (in contrast with an FSA where the funds are forfeited).

HSAs (health savings accounts) and MSAs (medical savings accounts) are used in conjunction with a high deductible health insurance plan.  MSAs were discontinued and replaced by HSAs.  HSAs and MSAs are savings accounts that can be funded with employee or employer contributions on a pre-tax basis.  Amounts can be withdrawn from these accounts tax-free if they are used to pay medical expenses.

Health Care Law Shows No Love for Over the Counter Medications

Effective January 1, 2011, expenses incurred for a medicine or drug will be treated as:

  • a qualifying reimbursement under a FSA or HRA or
  • a qualifying distribution from an HSA or MSA

for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

Therefore, under the new law, expenses incurred for medicines or drugs may be paid or reimbursed by an employer provided plan or distributed from an HSA or MSA if the medicine or drug:

  • requires a prescription
  • is an over the counter medicine or drug and the individual obtains a prescription for it (this refers to the italicized and bold language in the preceding paragraph)
  • is insulin
I have been reading newspaper accounts of people calling their doctors to get prescriptions for over the counter drugs.  Doctors are swamped with these calls are are now requiring an appointment before they will issue such a prescription.  The cost of the doct

or visit exceeds the benefit of having a prescription that allows the tax benefit.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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