Limitation of Distributions from Health Accounts for Over-the-Counter Medicines

(Note : For the next few weeks, Health Reform Talk will focus on detailed explanations for specific provisions in the new health reform law.)

So what’s included in Sec. 9003 of the Affordable Care Act, concerning limitations on distributions from health accounts for over-the-counter medications?

The definition of qualified medical expenses, for purposes of reimbursements from health flexible spending arrangements (health FSAs) or health reimbursement arrangements (HRAs), and distributions from health savings accounts (HSAs) or Archer medical savings accounts (Archer MSAs), has been modified to include amounts paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

Therefore, reimbursements for over-the-counter medicines through a health FSA, HRA, or other employer-provided accident or health plan may not be excluded from the employee’s gross income. Also, distributions from a HSA or Archer MSA to pay for over-the-counter medicines may not be excluded from the employee’s gross income and will be subject to the additional penalty. This modification conforms to the definition for purposes of the itemized deductions for medical expenses.

State Tax Consequences. The exclusion of over-the-counter medicines and drugs from qualified medical expenses for purposes of the rules on HSAs, Archer MSAs, health FSAs, and HRAs will not affect those states, like California and Alabama, that do not recognize HSAs. Some states, such as Pennsylvania, that refer to qualified medical expenses under federal law, will be affected by this change unless/until the state updates its code conformity date.

Effective date. This provision is effective with respect to tax years beginning after Dec. 31, 2010.

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