The IRS recently ruled that a health care flexible spending account (FSA) may reimburse a participant for nonprescription (also known as "over-the-counter" or OTC) antacids, allergy medicines, pain relievers, and cold medicines (but not vitamins). Revenue Ruling 2003-102 was issued September 3, 2003, and also applies to health reimbursement arrangements (HRAs).
Under an FSA, an employee elects to have his or her pay reduced in exchange for reimbursement of medical expenses that are not covered by the employee's other health plan coverage. An HRA is an employer funded "account" for each employee, from which the employee may be reimbursed for medical expenses.
Before this Revenue Ruling, most people believed that health care FSAs and HRAs could only reimburse medical expenses that would be deductible under the Internal Revenue Code, and the only medicines that are deductible are prescribed drugs and insulin.
However, in the Revenue Ruling the IRS acknowledges that there is no requirement that a health care FSA or HRA limit reimbursement to medical expenses which would be deductible, so long as the expense is for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.
On the other hand, the IRS took the position that expenditures that are "merely beneficial to the general health of an individual," such as vitamins or diet supplements, are not considered medical expenses for health care FSA or HRA purposes.
It should be noted that this same logic would indicate that Health Savings Accounts (HSAs), which are described in detail in an earlier article in this issue of TOPICS, may also be used to pay for over-the-counter medicines.