Tax Savings On OTC Medications: Use Flexible Spending Accounts

Because of financial reasons, fewer employers are offering Flexible Spending Accounts (aka Flexible Spending Arrangements or FSAs). If you are fortunate to still have one, then you may want to hear about the IRS changes that impact eligible expenses for such accounts in 2011. The new statutory changes apply to covering over-the-counter drugs and medicines. So are we going to wind up paying out-of-pocket for these expenses? Not necessarily.

Let’s take a look at FSAs for a moment. So what’s the deal with these accounts? Statistics reveal that most people who have FSAs do not bother to use them. Only one out of three eligible employees takes advantage of such accounts. This is probably the case because of concerns employees have with potentially forfeiting funds they have in such accounts (ie. the “use it or lose it” rule). Of those people who do have FSAs, many do not spend the deposited money, so unspent cash goes back to the employer. You stand to lose out on tax break savings.

Going beyond disinterested account holders, hassled doctors add to the wasted money. Failing or refusing to write a prescription equals lost money for patients. With the new changes for 2011, it is likely even fewer people will invest in and benefit from a Flexible Spending Account. But what are they losing? Check out this diagram from Banner Health showing an example FSA and its worth:

Prescriptions Needed For OTC Medication Reimbursements

The thing is, doctors don’t often offer a prescription for over-the-counter medicines that they recommend, even if the medications are an essential part of treatment. Since fewer people have FSAs, the doctor might simply overlook writing a prescription or think that it’s unnecessary. Let your doctor know that you need a prescription for everything he wants you to use.

Under the new standard for the Affordable Care Act, effective on January 2, 2011, an OTC drug or medicine cannot be reimbursed from your account unless you get a prescription (or script). This little piece of paper is literally worth its weight in gold.

While many busy doctors aren’t concerned about taking time to write a prescription for Tylenol, your tax deduction depends on it, so encourage your doctor to write one. You can also enlist the assistance of a staff member, such as the office manager, to produce such prescriptions when you need them. Without the prescription, you’re out the money.

Exceptions To Getting A Prescription

Sounds like a pain? Well, you do this often enough and it becomes a habit. Also, certain items would be cumbersome to get a prescription for all the time. For instance, my friend is an insulin-dependent diabetic. Even if he purchases his insulin without a script, his medication can be reimbursed. The new requirement does not affect insulin, even if you buy it without a prescription.

Basically, the new rule does not apply to items for medical care that are not drugs or medicine such as:

• Medical equipment such as crutches;
• Supplies such as bandages; and
• Diagnostic devices such as blood sugar kits.

Other essential health care expenses also do not require a prescription (or authorization) for reimbursement such as eyeglasses, contact lenses, medical devices, deductibles and co-pays. Click here to download this complete list of items that might not require a prescription.

Also, claims for OTC drugs or medicines purchased without a prescription before January 1, 2011 can still be reimbursed. Check to see if it’s too late to submit your receipts from 2010 to make the most of your FSA.

How Do I Get Reimbursed Through My FSA?

Submitting proof to your employer’s FSA for reimbursement is easy. You need to provide a copy of the prescription or an item proving the prescription was issued along with a customer receipt for the OTC medicine or drug. A customer receipt showing your name, the date and the amount of purchase with the RX number would qualify as proof.

Some FSAs have a grace period of up to 2 ½ months. Even if your employer’s plan has a grace period provision, the cost of OTC drugs and medicine purchased without a script during months in 2011 will not be eligible to be reimbursed by your health FSA. What your boss approves is not what the government dictates according to these new changes.

Get Tax Savings With Flexible Spending Accounts (FSAs)

While you can’t do anything about the new rules, you can approach your Flexible Spending Account differently to get the most from it.

• Know how much you should be placing in your FSA. Use a tool or calculator like this to figure it out!
• Spend your 2011 funds earlier in the year to cover medical expenses and don’t let them go to waste. Just don’t forget the fact that you have an Flexible Spending Account — that’s already half the story for many employees!
• Keep accurate records of prescriptions and purchases and remember to submit them.
• Talk to your physician about protocol for getting prescriptions for OTC drugs and medicines so you know what to expect this year. If there is an extra charge, do the math to see how much you will save by using your FSA in 2011. If your doctor refuses to write prescriptions for OTC drugs (which seems a bit unusual, as good physicians are usually quite reasonable and cooperative), consider whether it is worth finding another doctor who will.

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