IRS Approves Reimbursements under FSA of OTC Drugs and Medicines

On September 3, 2003, the Internal Revenue Service (IRS) released Revenue Ruling 2003-102, which significantly changes the IRS's position that only prescription drugs may be reimbursed under a Section 125 Flexible Spending Account (FSA). As a result, a FSA plan may reimburse participants for expenses incurred for eligible OTC drugs and medicines, subject to certain limitations, as long as the plan document and SPD do not specifically prohibit that type of reimbursement. If the plan and SPD do currently prohibit this type of expense, the plan and SPD should be amended accordingly prior to allowing such expenses to be reimbursed. Examples of allowable non-prescription medicines and drugs are, as specifically set out in Revenue Ruling 2003-102 include, antacids, allergy medicines, pain relievers and cold medicines. Please find the a link to Revenue Ruling 2003-102 and Press Release below:

http://www.irs.gov/pub/irs-drop/rr-03-102.pdf

http://www.irs.gov/newsroom/article/0,,id=112623,00.html

OTC Reimbursement Limitations and Exclusions

In order to be reimbursable under a health FSA, OTC drugs and medicines must be purchased to alleviate or treat personal injuries or sickness - not merely for benefiting one's general health. Therefore, amounts paid by an employee for dietary supplements, such as vitamins, that are merely beneficial to the general health of the employee or the employee's spouse or dependents, are not reimbursable under a health FSA. Furthermore, the term "medicine and drugs," as defined under Section 213, includes only items that are legally procured and generally accepted as falling within the category of medicine and drugs and further provides that toiletries (e.g. toothpaste), cosmetics (e.g. face creams) and sundry items are not "medicines and drugs." Items used for cosmetic purposes are still ineligible for reimbursement (e.g. Propecia, Rogaine) as are, as mentioned above, dietary supplements (e.g. vitamins).

Ruling Does Not Constitute a Status Change Event

This change in IRS position does not constitute a status change as defined under Treas. Reg. Section 1.125-4 (Permitted Election Changes) and consequently no election changes are allowable based on Revenue Ruling 2003-102.

Effective Date of Change

In order for an expense to be reimbursable under a health FSA, such reimbursement must be allowed under the regulations, but also must be allowed under the terms of the plan. According to Barbara Pie of the Office of Division Counsel/Associated Chief Counsel (Tax Exempt and Government Entities), FSAs may take advantage of this ruling in their current plan years if the plan documents allow it. Many FSAs presently have exclusions for OTC drugs and according to Ms. Pie, these exclusions would have to be removed. However, some plans do not specifically exclude OTC nonprescription drugs. These plans can begin to reimburse OTC drugs in the current plan year (even retroactive to the beginning of the plan year). Thus, if you use a ProBusiness Summary Plan Description (SPD) as a starting point for your plan's SPD, a minor update will be required to allow for the reimbursement of OTC drugs and medicines. Based on the change of position by the IRS, ProBusiness will send clients an amendment to their SPD that the clients and their advisors may adopt accordingly. This amendment will be sent to clients for whom ProBusiness provides FSA administrative services. ProBusiness suggests that clients update their SPD prior to allowing participants to submit reimbursement requests incurred after the plan amendment date for OTC drugs and medicines.

Return to Top

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (800) 269-5231
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

Return to Top