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OTC drugs now covered by an FSA

Dear Tax Talk,
I heard that you can receive reimbursement for nonprescription drugs under a cafeteria plan with the new 2003 tax law. Is that correct, and how do they define "drugs"?
Thank you,
A.T.

Dear A.T.,
The Internal Revenue Service has gotten more flexible with flexible spending accounts.

An FSA is an employer-sponsored plan that allows you to receive tax-free reimbursement for certain expenditures and services not covered by insurance such as health insurance. Some employers build this feature into their cafeteria plans, some don't. An FSA can cause employers a lot of paperwork and costs that they may not want to be burdened with.

Of course, your employer is not giving money away. You get reimbursed after deferring part of your own compensation into the FSA. For example, if you know you have to pay for eyeglasses, dental cleanings, prescription and physician co-pays and the like every year, you might choose to set aside $500 of your annual salary into an FSA to pay for these non-covered expenditures. As you incur these expenses, you submit the receipts to your employer, who reimburses you tax-free from the funds in your FSA.

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Prescription medicines are being pushed into over-the-counter form so that they no longer are reimbursed by your insurer. OTC medications also are not deductible as itemized medical expenses. The IRS ruled recently that an employer under an FSA could reimburse OTC medications such as antacids, allergy medicines, pain relievers and cold medicines that are used by an employee and his dependents.

The IRS went on to say that dietary supplements (e.g., vitamins) are merely beneficial to an employee or employee's spouse or dependents' general good health. Therefore, the cost of the dietary supplements is not an expense for medical care and is not reimbursable.

-- Posted: May 20, 2004

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