If you have a flexible spending account, or plan to sign up for one in the workplace benefits enrollment season that will soon be here, remember that medical flexible spending accounts face a change in 2011.
With such an account, usually referred to as an FSA, you can contribute money directly from your paycheck and then use the FSA funds later to pay for eligible medical expenses that aren't covered by your insurance. These also save you some tax money, since your paycheck contributions are made before your payroll taxes are calculated.
In 2003, the IRS made FSAs even more appealing by letting account owners use the money to pay for over-the-counter, or OTC, medications. This option made it even easier to avoid losing FSA money. If leave any cash in your FSA at the end of the benefit year (or the grace period if you company offers it), you lose that case.
By letting folks buy OTC items off store shelves, they were able to spend down every last FSA dollar.
The new health care reform act, however, changes that.
OTC drugs are still FSA reimbursable expenses, but beginning in 2011 that applies only if the medications are prescribed by a doctor. I guess that sort of make them quasi-prescription meds.
In Notice 2010-59, Guidance on Changes to Rules for Reimbursement of Over-the-Counter Drug Expenses, the IRS has officially announced that FSA funds can be used to pay for medicines or drugs only if:
- The medicine or drug requires a prescription, or
- Is available without a prescription (an over-the-counter medicine or drug) and the individual obtains a prescription, or
- Is insulin.
So if you have a terrible cold and want NyQuil, you'll have to get it in formal writing that your doctor said you should guzzle the stuff or your FSA administrator won't give you the money for it.
OTC overkill: The IRS regs also discuss how to substantiate your OTC purchases for FSA purposes.
Under the new rule, before an FSA administrator can reimburse you an over-the-counter medicine or drug purchases, you must provide the prescription (or a copy of the prescription or other documentation that a prescription has been issued) for the medicine, along with "other information from an independent third party that satisfies the requirements." This includes:
- A customer receipt issued by a pharmacy which identifies the name of the purchaser or the name of the person for whom the prescription applies, or
- The date and amount of the purchase and an Rx number satisfies the substantiation requirements for over-the-counter medicines or drugs, or
- A receipt without an Rx number accompanied by a copy of the related prescription.
I have a few concerns here.
You're probably going to have to make an appointment to get the prescription for the OTC treatment.
That means you'll be out another co-pay or deductible amount for an added office visit. At least you can use your FSA to pay for that.
But isn't that added use of your insurance going to mean that its cost, to you and your employer, is going to go up, too?
Some transition leeway: The IRS is offering some leeway for folks to get used to the new rule, which also will apply to Health Savings Accounts (HSAs) associated with high-deductible health plans and Archer Medical Savings Accounts (Archer MSAs).
First, don't panic now. The new prescription-required standard applies only to purchases made on or after Jan. 1, 2011. So I suggest buying up as much still FSA-OK OTC items as you can this year with your workplace account funds.
Also, some things still will be treated as they are now.
As noted earlier, insulin is excepted. So are eye glasses and contact lenses, as well as medical devices, such as crutches, bandages and diagnostic items items like blood sugar test kits or blood pressure reading equipment.
These and similar items remain eligible as FSA reimbursable medical care as long as they meet the tax definition of medical care, which is "expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body."
However, expenses for items that are merely beneficial to the general health of an individual, such as an expenditure for a vacation or vitamins, have never been classified as FSA-eligible and remain on the no-reimbursement list.
Debit card difficulties: Finally, note that if you've been using a debit card for FSA or HSA expenses, they won't be as handy next year.
These pieces of plastic aren't set up to comply with the OTC Rx requirement that goes into effect next year. Basically, the card systems are incapable of recognizing and substantiating that the medicines or drugs were prescribed.
Therefore, says the IRS, you can't use health account debit cards to purchase over-the-counter medicines or drugs. You can, though, continue to use your medical debit card for other allowable medical expenses.
So if you have an FSA, HSA or MSA or plan to open one in 2011, make sure you take into account the tougher reimbursement rules as you make your employer-provided health care benefit decisions.
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