A small, but important, component of the health care reform bills passed earlier this year will eliminate tax-free reimbursement of over-the-counter drugs beginning in 2011.  And while several lawmakers have vowed to dismantle the health care reform laws, this provision has none of the controversy surrounding many of the others.  It will likely remain intact for that reason.

Tax-Free ReimbursementCurrently, employer health plans may reimburse employees for most drugs and medicines, including over-the-counter drugs.  Such plans include health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer medical savings accounts (MSAs), as well as others.  This will all change in the New Year. After 2010, reimbursement of over-the-counter drugs will no longer qualify for tax-free treatment. 

The IRS has said that for HSAs and MSAs, reimbursement for OTC drugs purchased after 2010 will be considered for nonqualified medical expenses.  For FSAs and HRAs, reimbursement for expenses incurred after 2010 for OTC drugs will be considered nonqualified.  Reimbursement for expenses incurred before 2011 may be made at any time for FSA and HRA plans.  Note the difference between the date purchased and date incurred under the various plan types.

The IRS has also said expenses for OTC drugs will still be eligible for tax-free reimbursement if the taxpayer obtains a prescription for the OTC drug.  Thus prescribed drugs, insulin and OTC drugs obtained by prescription will continue to receive tax-free treatment under the new law.

More information about the changes can be found at http://www.irs.gov/newsroom/article/0,,id=227308,00.html.

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