Open enrollment season is right around the corner. As you make health-care choices for the coming year, remember, over-the-counter medication expenses no longer will be reimbursed from health flexible-spending accounts (FSAs).
If you have a health-reimbursement account (HRA), health-savings account (HSA), or Archer Medical Savings Account (MSA), similar rules apply. FSAs allow you to use pretax dollars to pay for medical expenses that your insurance doesn't cover, such as deductibles, co-pays, and orthodontia.
It's a good deal for most people, but there's a catch: You need to use your FSA balance by the end of the year. If you don't, then under the "use it or lose it" rule, you lose any money left in your FSA at year's end.
As part of health-care reform, the Patient Protection and Affordable Care Act changed the FSA rules. Under the new rules, effective Jan. 1, 2011, an FSA cannot reimburse you for the cost of over-the-counter medications or drugs unless a physician prescribes them.
The new rule does not apply to insulin, even if purchased without a prescription, and items that are not medications or drugs, including eyeglasses, contact lenses, bandages, and blood sugar test kits. Any expenses incurred for over-the-counter medications or drugs purchased without a prescription before Jan. 1, 2011, are eligible for reimbursement in accordance with your employer's FSA plan rules. Similar rules apply to health-reimbursement arrangements.
This new rule means you need to carefully estimate expenses when deciding how much to contribute to your FSA so you use your FSA balance by year's end. In the past, if you had FSA funds left at the end of the year, you could stock up on aspirin, cough and cold medications, and sleep aids. But if you overestimate expenses for 2011, you risk losing unused FSA funds unless you have a prescription to purchase over-the-counter medications.
If you have a high-deductible health plan and an HSA, or are switching to one during open enrollment, keep in mind that similar rules apply to HSAs and Archer MSAs.
For amounts paid from HSAs and Archer MSAs after Dec. 31, 2010, the cost of an over-the-counter medication is treated as a tax-free qualified medical expense only if a physician prescribes the medication or if the medication is insulin. The good news is that, unlike FSAs, there is no "use it or lose it" rule with HSAs and Archer MSAs. Any unused funds carry over to the following year, so you aren't forced to spend your unused funds by year's end. And with HSAs and Archer MSAs, you still can reimburse yourself for over-the-counter medications obtained without a prescription. However, you'll be penalized because the amount reimbursed is treated as a nonqualified medical expense. You must include the amount in gross income, and generally pay an additional 20% tax on the amount.
This change does not affect HSA or Archer MSA distributions for medications or drugs made before Jan. 1, 2011, or distributions made after Dec. 31, 2010, for medications and drugs purchased on or before that date.
Start estimating your expenses now to make sure you contribute the right amount to your FSA and avoid having unused funds at the end of the year. If you have an HSA, don't worry, as any unused funds belong to you and carry over to following years. Just remember not to reimburse yourself for that bottle of aspirin, unless you have a prescription for it.