The various sources that keep me up to date on tax changes keep emailing me that: starting next year over-the-counter medicines and drugs can no longer be reimbursed from flexible spending accounts and health reimbursement arrangements, unless purchased with a prescription (but then they're no longer OTC, are they?).
What was the rationale behind this change? Was there some kind of large-scale abuse of this provision?
Lee
I can't confirm that this is the reason, but it does bring it in line with the items deductible under IRC 213 as medical expenses.
Maybe, as amazing as it sounds, it was done in the name of simplification -- why should there be different rules for very similar tax benefits? That, plus raising some more tax revenue...
-Mark Bole
I'll buy the raising tax revenue part. If simplification was desired, they would simply say OTC drugs were deductible.
It seems it is ALWAYS about raising tax revenue.
Prior to a revenue Ruling in 2003, OTC drugs were not reimbursable under employer plans. The revenue ruling explained that the statutory rule that excluded employer reimbursements for medical expenses from income was much broader than the statutory exclusion that disallowed a deduction for nonprescription drugs (insulin being the exception). Therefore, reimbursement by an employer for nonprescription drugs could be excluded from income. The Patient Protection & Affordable Care Act adds a new section to the Code that restores the pre-2003 rules by statute. The section in the "Act" that did this was in the Title & Subtitle called Revenue Offsets. I think we can all conclude that it was a revenue raiser to offset some of the costs of the "Act."
Some states pay for OTC drugs under Medicaid if a doctor writes q prescription for them. It's a way to verify medical necessity.
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