Legal Bulletins

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).

Before this Revenue Ruling, most people believed that health care flexible spending accounts could only reimburse medical expenses that would be deductible under Internal Revenue Code Section 213(a). Under that provision, 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 FSA limit reimbursement to medical expenses which would be deductible under Internal Revenue Code Section 213(a), 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, IRS regulations take the position that expenditures that are “merely beneficial to the general health of an individual” are not considered medical expenses.

The Revenue Ruling expressly permits a health FSA or HRA to reimburse a participant for the cost of OTC antacids, allergy medicines, pain relievers, and cold medicines. Many plan advisors believe that other types of OTC drugs are also properly reimbursable However, a health FSA cannot reimburse a participant for the cost of vitamins because they are "merely beneficial to the participant’s general good health."

Before advising employees that nonprescription drugs are now covered under their health FSAs and HRAs, employers must consider several issues.

First, the health FSA or HRA plan document may need to be amended. If the plan document limits reimbursements to those that would be deductible under Internal Revenue Code Section 213(a), or if the plan document otherwise excludes reimbursement for nonprescription drugs, an amendment is needed. However, if the plan document permits reimbursement for expenses incurred for medical care as defined by Internal Revenue Code Section 213(d), and does not otherwise exclude reimbursement for nonprescription drugs, no plan amendment is needed. Indeed, if the plan document defines reimbursable expenses by reference to Section 213(d), and does not otherwise exclude OTC medicines, the health FSA or HRA is now required to reimburse for nonprescription drugs.

Second, if a plan amendment is needed, employers should consider when the amendment should be effective. The Revenue Ruling does not specify an effective date, so unless the plan specifies otherwise (e.g., a provision requiring that claims be filed within 90 days after the expense is incurred), participants may receive reimbursement for nonprescription drugs purchased since the beginning of the current plan year. In addition, participants may not change their health FSA elections mid-year merely because the plan permits reimbursement of nonprescription drugs.

Third, plan administrators should review their substantiation procedures for claims involving nonprescription drugs. Health FSAs and HRAs may reimburse participants only for medical expenses incurred for themselves, their spouses, and their dependents. This is easily verified in the case of prescription drugs, but a bottle of aspirin could be purchased for anyone, including a friend or neighbor. Therefore, if there is not already a requirement that the participant certify that all reimbursement requests are for expenses incurred for the participant, the spouse, or a dependent, the plan administrator should probably add that requirement in order to avoid (or at least reduce) improper reimbursements.

Finally, as indicated in the Revenue Ruling, a participant cannot receive reimbursements for all nonprescription drugs. To be reimbursed, the expenses must be for medical care as defined by Section 213(d) of the Internal Revenue Code, which generally rules out vitamins, dietary supplements and other products that do not "alleviate or treat personal injuries or sickness." Plan administrators should review their substantiation procedures to ensure that only proper reimbursements made.