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A Better Partnership


Oct 2009
October 20, 2009

New IRS Considerations Regarding Over-the-Counter Items as Medical Care Expenses

The IRS recently provided new guidance on whether certain over-the-counter pharmacy purchases are eligible for reimbursement through a health care Flexible Spending Account (FSA) and Health Reimbursement Account (HRA).

FSAs and HRAs may reimburse participants for certain medical care expenses. In order to qualify as a medical care expense, the expense must be for medical care as defined under Tax Code § 213(d). In general, expenses qualify as medical care if they are "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body[.]"

Items purchased only for medical purposes will qualify as medical care. However, items purchased for personal purposes will not. A problem arises when an item could have a medical or a personal purpose. These items are described as dual-purpose items.

In its guidance, the IRS summarizes the objective factors that you must consider when determining if an expense for a dual-purpose item qualifies as medical care. These factors include:

  • The purchaser's motive or purpose,

  • A physician's recommendation that the item be used as treatment for a medical condition,

  • The link between treatment and illness,

  • The treatment's effectiveness, and

  • The proximity of onset or recurrence of a medical condition.

In addition, the purchaser must prove that the expense would not have been paid "but for" the medical condition.

The IRS identifies a number of over-the-counter items that normally will not qualify for medical care, unless the item is used "to treat or alleviate a disease or injury" and the "but for" test is met. These items include sunscreen, face masks, skin products, antibacterial hand sanitizers, fluoride rinses, petroleum jelly, fiber supplements, and probiotics to maintain general health. Your plan should normally not reimburse these items, and when it does, it will need to carefully substantiate that these costs qualify as medical care expenses.

The IRS guidance also highlights other types of goods that require additional inquiry. For example, wheelchair cushions may be a necessary accessory to a wheelchair. Also, the excess cost of specialty clothing used to treat a specific disease, such as diabetic socks, compression hose, or orthopedic shoes, may qualify as a medical care expense, to the extent that such costs exceed the cost of normal clothing. While the cost of food normally is not a medical care expense, whether the cost for food thickeners is a medical care expense is determined on a case-by-case basis. In each of these circumstances, you will need to document that the item is medical care and that the "but for" test is met.

On the other hand, the IRS notes that treatments for acne, incontinence, arthritis, constipation, colds and sinus problems, dehydration, indigestion, and support braces and shoe inserts for injured or weakened body parts, will generally qualify for reimbursement. In addition, products that have no purpose but to treat existing skin conditions (in contrast to preventing the development of the condition), such as eczema treatments, will generally qualify for reimbursement.

While the IRS guidance adds some certainty, it also reminds us that for many over-the-counter items, reimbursement cannot be automatic. If you decide to cover the expenses of dual-purpose items as part of your FSA or HRA benefit program, you must ask questions necessary to verify that those expenses are reimbursable medical expenses.

If you have any questions regarding reimbursement of expenses under an FSA or HRA program, please contact a member of the WNJ Employee Benefits Practice Group.

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