Excluding reimbursements from health FSAs for OTC drugs.

• Author: Pozarnsky, Sylvia
• Position: Individuals

Reversing its position, the IRS ruled in Rev. Rul. 2003-102 that reimbursements from an employer-sponsored health flexible spending arrangement (health FSA) under a cafeteria plan, health reimbursement arrangement or other employer health plan for over-the-counter (OTC) drugs are excludible from gross income under Sec. 105(b); however, amounts paid for dietary supplements are not reimbursable and not excludible. The Service also stated that, despite the availability of the exclusion for an FSA reimbursement, an individual cannot deduct these expenses as Sec. 213 medical expenses.

Facts

In the ruling, employer N sponsors a health FSA that reimburses participating employees for medical care expenses not covered by other insurance. Participating employee A purchases an antacid, an allergy medicine, a pain reliever and a cold medicine from a pharmacy without a prescription. The items are purchased for A's personal use (or for the use of A's spouse or dependents) to alleviate or treat personal injuries or sickness. A also purchases dietary supplements (e.g., vitamins) without a prescription to maintain A's general health and that of his or her spouse and dependents.

A submits substantiated claims for all of these expenses to N's health FSA for reimbursement. A is not compensated for those expenses by insurance or any other plan.

Law and Analysis

Under Sec. 105(b), except for amounts attributable to deductions allowed under Sec. 213 for any prior tax year, amounts reimbursed to an individual for medical care expenses are not included in gross income. Regs. Sec. 1.213-1(e)(1)(ii) provides that an expenditure for an individual's general health is not a medical care expenditure. Kegs. Sec. 1.213-1(e)(1)(ii) provides that expenditures for "medicines and drugs" are medical care expenditures. However, this phrase only includes "items that are legally procured and generally accepted as falling within the category of medicine and drugs"; see Regs. Sec. 1.213-1(e)(2). Toiletries, cosmetics and sundry items are not medicines and drugs and, thus, their costs are not medical care expenditures; see Regs. Sec. 1.213-1(e)(2).

In Rev. Rul. 2003-58, the Service ruled that amounts paid for medicines or drugs purchased without a prescription are not taken into account under Sec. 213(b) and, thus, are not deductible under Sec. 213. However, Sec. 105(b) specifically refers to medical care expenses as defined in Sec. 213(d). Sec. 105(b) does not require that the...