OTC Drugs Under ACA

[Chaz]

Under Section 9003 of ACA (I guess that's what we're calling the health care act), FSAs will generally no longer be permitted to reimburse for any over-the-counter "medicine or drug." Two questions:

1-Currently, I am able to be reimbursed under my FSA for contact lens solution. Will I be able to continue doing so because lens solution is not a "medicine or drug"?

2-Section 9003 applies to "amounts paid with respect to taxable years beginning after December 31, 2010." How is that applied to FSAs with grace periods? For example, can I be reimbursed for Tylenol that I purchase in 2011 during the grace period if I use amounts left over in my account from 2010?

Any thoughts are appreciated.

[oriecat]

Good questions!

Isn't it PPACA?

[Chaz]

Good questions!

Isn't it PPACA?

I've seen it both ways. I can't say "PPACA" without tying my tongue up in knots.

[oriecat]

I've decided to say it as "pe-pack-a", in my head anyway. Or "healthcare reform".

[masteff]

I've been dealing w/ auditors and when I was catching up on my reading came across the elimination of OTCs starting next year.

To answer the OP questions....

1) I'll go w/ it's not a medicine or drug.

2) I'll go w/ depends on the exact wording of the law... some of those "years beginning on or after" dates can get a bit hard to figure.

[LRDG]

It depends on how the amendment to repeal reimbursement of OTC drugs is worded and if Sec. 213 is also amended.

Before Sec. 125s were permitted to reimburse OTCs for expenses such as cold meds, asprin, etc., Sec. 213 provided a description of eligible medical procedures and circumstances under which they were eligible for purposes of income tax deduction and for exclusion from income via MFSAs.

Sec. 213 includes expenses for medically necessary supplies for self injections for diabetics, such as syringues and cotton swabs, or supplies for conveselent home care that are medically necessary for administration or treatement of dx'd medical conditions. Bed pans, lifting devices to transfer from bed to wheelchair, and expenses for similar supplies, always with the underlying requirement of medical necessity and supporting documentation from a physician, licensed therapist, etc.

These types of expenses have been eligible under Sec. 213 prior to adoption of Sec. 125 by the IRS, and long before Sec. 125 was amended (in 2003) to allow OTCs. Contact lens solutions are eligible via Sec. 213, not the later amendment allowing OTCs.

If the amendment that allowed OTCs is repealed, then your solutions will probably continue to be eligible. If however, in addition to repealing the (2003) amendment that allowed OTCs, if Sec. 213 is also amended to exclude medical supplies necessary for administration/treatement of medical condition/dx, then it's unlikely contact lens solutions will continue to be eligible for reimbursement from your MFSA, and unlikely that it will be eligible for income tax deduction.

With respect to "2-Section 9003 applies to "amounts paid with respect to taxable years beginning after December 31, 2010" , FSAs usually refer to "plan years beginning after" , a specific date. It seems the only interpertation is OTC is ineligible for service dates for "amounts paid with respect to taxable years beginning after December 31, 2010".

OTC is not eligible for expense incurred for taxable years beginning after December 31, 2010, regardless of FSA grace periods. It's the only interpertation because the language is not more specific with respect to Sec. 125 plans and grace period provisions. For example plan years ending on 06/31/11 would allow OTC with service dates through 12/31/10 based on info you provided.

I haven't yet seen a reference to Section 9003 of ACA , haven't heard about repeal of OTC either. Do you have a link?

Sixth paragraph edited: eligible edited to read ineligible; and eligible edited to read not eligible

[LRDG]

I found a number of web sites with info about OTC's, adoption of OTCs as eligible for exclusion from income for FSAs, HRAs, HSAs, MSAs, etc., but few with IRS links or direct link to IRS cites.

Based on some of the reading I've done, in 2003 Sec. 105 was amended to allow OTCs for purposes of FSAs, HRAs, HSAs, MSAs, etc.

Sec. 213 was not amended to allow OTCs, leaving this class of meds taxable for purposes of Medical Income Tax deductions from individual income.

Programs for weight loss that are not recommended by a physician as treatement of disease and well as OTC weight loss meds were not included in the amendment in 2003 of Sec. 105.

I appologize for not providing IRS links. The resourses required to provide the summary of info above might be enough that IRS links will be posted for the necessary verification. It's possible the info may only be available via CCH or similar hard copy/web subscription publications authorized by IRS.

[Guest djw]

With respect to "2-Section 9003 applies to "amounts paid with respect to taxable years beginning after December 31, 2010" , FSAs usually refer to "plan years beginning after" , a specific date. It seems the only interpertation is OTC is ineligible for service dates for "amounts paid with respect to taxable years beginning after December 31, 2010".

To LRDG: To which "taxable year" does section 9003 apply; the employee's or the plan's? They may not be the same.

[LRDG]

To which "taxable year" does section 9003 apply; the employee's or the plan's? They may not be the same.

Before Sec. 125, there were income tax deductions under Sec. 213 for medical expenses and a dependent care tax credit under Sec. 21, both of which include language that is consistent with the tax year of the tax payer.

When Sec, 125 was adopted, it referred to the respective IRC Sec's 213 and 21 for a description of expenses that are eligible under a Sec. 125 plan. Sec. 125 states plan years can be no more than 12 months except for the 1st plan year which can be a short plan year; the 12 months but need not be a calendar plan year.

The problem with 'tax year' and 'plan year' has been overlooked when IRS amendments were issued in the past. Public response to IRS pointed out the prospective elections involved and potential for forfeitures with respect to Sec. 125s operating on non-calendar plan year basis. IRS usually responded by revising language to include 'plan year' in amendments.

It is possible IRS's position will not change, that they will stick with 'tax years beginning after December 31, 2010', in which case MFSAs should operate accordingly. If that is the case, participants should be urged to spend OTC funds no later than 12/31/10.

[QDROphile]

What is the source that informs us of the IRS interpretation of the effective date provision?

[Guest alyssakim]

What is the source that informs us of the IRS interpretation of the effective date provision?

Benefits link is that source unfortunatlely..

[Chaz]

The IRS issued Notice 2010-59 a couple of days ago. It answered my questions:

1-January 1, 2011, is the date, regardless if there is a grace period.

2-It is only OTC drugs and medicines that are not reimbursable (unless there is a prescription).

[LRDG]

Medical FSAs continue to recognize medically necessary supplies and devices described in Sec. 213. Sec. 213 includes expenses for medically necessary supplies for self injections for diabetics, such as syringues, cotton swabs and nonprescription insulin; medicines or supplies for conveselent home care that are medically necessary for administration or treatement of dx'd medical conditions. Bed pans, lifting devices to transfer from bed to wheelchair, and expenses for similar supplies, always with the underlying requirement of medical necessity and supporting documentation from a physician, licensed therapist, etc.

Chaz Mar 31 2010

1-Currently, I am able to be reimbursed under my FSA for contact lens solution. Will I be able to continue doing so because lens solution is not a "medicine or drug"?; and

Sep 7 2010, 07:15 AM

2-It is only OTC drugs and medicines that are not reimbursable (unless there is a prescription).

IRS remains silent on the eligibility of Contact lens solutions. I considered this expense eligible under Sec. 213, similar to cotton swabs for RX injectibles and non-RX insulin, and similar medically necessary supplies essential to administration of a medical treatement for a diagnoised medical condition. I consider a RX for the contact lens to include solution because it is essential to the medically correct use of RX'd contacts, is included in consultation w/medical professional rx'ing the lens. Contact lens solutions are necessary for administration/treatement of dx'd disorder of the eye/correction of vision.

[masteff]

Just occurred to me... what about antiseptic cream or anti-itch cream? Do those active ingredients (especially hydrocortisone) count as OTC medicines (that just so happen to be applied topically)? Imagine that Bandaids are allowable but Neosporin might not be! I can guarantee that athletes' foot creams won't be allowed since most of the current ones were developed by pharmaceutical companies and are recognized by the FDA.

While artificial tears might only contain saline and artificial lubricants and thus be allowable as they help treat the condition of dry eyes, what about a different formulation of the same tears that also happen to contain active ingredients for dry eyes or allergies or other eye conditions? Wouldn't those active ingredients count as OTC meds?