As of January 1, 2011, over-the-counter (OTC) drugs or medicines, except prescribed OTC drugs and insulin, no longer qualify as eligible medical expenses for health reimbursement arrangements (HRAs), health savings accounts (HSAs), flexible savings accounts (FSAs), and Archer medical savings accounts (MSAs). Although Kaiser Permanente doesn't offer MSAs, our members may have accounts through their employers.
Members using HRA and FSA debit cards to purchase OTC drugs or medicines are required to provide appropriate prescription documentation. Approved purchases will be considered fully substantiated at the point of sale. However, it is recommended that members keep copies of their prescriptions and receipts for tax purposes or in case the HRA or FSA vendor requests additional substantiation.
Because HSA and Archer MSA debit cards work differently than HRA and FSA cards, OTC purchases may go through at the point of sale even if the purchases don’t qualify for reimbursement. Members will be responsible for substantiating their expenses with physician prescriptions, receipts, bills, and any other documentation needed for tax purposes. Non-qualified purchases using HSA or MSA funds will be subject to a 20 percent tax penalty.
Internal Revenue Service (IRS) guidance specifically provides that a health FSA and an HRA may allow reimbursements for medical expenses for any child who has not reached age 27 at the end of the employees tax year. However, HSA disbursements for an employee’s children’s medical expenses are exempt from federal income tax only if the child meets the narrower standard IRS definition of a dependent. HSA disbursements for children who don’t meet this stricter definition will be considered non-qualified expenses, which are subject to tax and penalties. Go here for more information.
If you have groups with health spending accounts, be aware of these changes so you can respond to client questions. For more information, please irs.gov.