NCPA - National Center for Policy Analysis

IRS Ruling Expands Health Spending Accounts

September 4, 2003

The Internal Revenue Service ruled Wednesday that workers who use pretax health-care spending accounts to pay for medical expenses can use them to pay for nonprescription drugs.

This means that employees of companies that offer so-called flexible spending accounts (FSAs), which set aside employees' pretax dollars to pay health care expenses, can use tax-free dollars to buy drugstore staples such as aspirin, antacids and allergy medicines, including popular drugs such as Claritin that until recently required a prescription.

  • About 10 million workers, or about 20 percent of those eligible, have FSAs, says the Employers Council on Flexible Compensation.
  • Ninety-one percent of large employers offer the plans, according to Hewitt Associates.

Previously, the only medicines that qualified for reimbursement were prescription drugs. But more prescription drugs are converting to over-the-counter status. Although drugs with OTC status are usually cheaper, many insurance plans stop covering the cost of prescription drugs when they become available over the counter.

There are still limitations on FSAs. Experts say workers are afraid to sign up for the accounts because they can't predict their out-of-pocket doctor and drug expenses and are afraid to lose their money under the IRS' use-it-or-lose-it rule. Under the rules, employees have a certain amount of money withheld from their paychecks, before taxes, to fund their accounts each year. The employee is reimbursed from the account throughout the year for expenses not covered by insurance, such as co-pays and deductibles for doctors' visits, treatment and medicines.

The rub is that any money left in the account at the end of the year is forfeited. President Bush has proposed that workers be allowed to roll over up to $500 of unused contributions into the following year.

Source: Pamela Yip, "Rx for Health Savings," Dallas Morning News, September 4, 2003.


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