Flexible spending and health savings accounts are valuable programs offered by many employers to help consumers save money. They work by allowing employees to put aside pre-tax dollars in order to pay for health-related items throughout the year. Under U.S. Internal Revenue Service (IRS) guidelines, most OTC medicines are reimbursable under employer-sponsored flexible spending accounts.
One of the healthcare reform financing mechanisms currently under consideration by U.S. Congress is the elimination of eligibility for OTC medicines to be reimbursed under flexible spending accounts (FSAs). CHPA strongly opposes such a measure, which would increase Americans’ out of pocket costs for needed medicines. CHPA provided its position on this issue in 2010 in a letter to Speaker of the House Nancy Pelosi and House Democratic Majority Leader Steny Hoyer and in 2009 in letters to the U.S. House Committee on Ways and Means and U.S. Senate Committee on Finance and again as part of a coalition in September 2009 letters to U.S. Senator Max Baucas and U.S. Representative Nancy Pelosi.
Over-the-counter medicines play an important role in the health status of millions of Americans by saving U.S. consumers an average of $20 billion per year in health care costs—taking into account prescription costs, doctor visits, lost time from work, insurance costs, and travel.
In order to support consumers' access to these cost-savings, CHPA is a strong advocate for favorable tax treatment for over-the-counter medicines.
Flexible Spending Accounts
Expansion of Federal Medical Expenses Deduction
Health Savings Accounts
State Sales Tax Exemptions
Flexible Spending Accounts
Additionally, certain dietary supplements may be considered reimbursable when a healthcare provider has suggested their use for a specific medical condition, such as iron for anemia. However, dietary supplements used for general health purposes are not eligible for reimbursement.
Expansion of Federal Medical Expenses Deduction
OTC medicines are an integral part of our nation’s overall healthcare system, and CHPA believes that the millions of consumers who use them each year should have the ability to offset the costs of these products just as they do other medical expenses such as prescription drugs, crutches, and contact lenses.
Under current law, OTC medicine purchases may not be included in the expenses that go toward meeting a consumer's adjusted gross income threshold (7.5%) as it relates to healthcare expense deductibility. However, in recent years, congressional initiatives to address this inequity by amending Section 213 of the federal tax code have been introduced.
The Internal Revenue Code allows the costs of drugs to be included in the deduction, but only prescription drugs and insulin. The code also allows the deduction to be taken for acupuncture, bandages, chiropractic care, contact lenses, crutches, hearing aids, health insurance premiums, lab fees, etc. The code does not allow the deduction for OTC medicines, such as analgesics, antihistamines, and OTC smoking cessation products. In other words, a drug loses its tax status as a medical expense simply by moving from a prescription to a nonprescription product. CHPA is working to address this inequity by promoting efforts to amend the federal tax code to ensure that OTC medicine expenses are treated the same as other medical expenses for purposes of qualifying for the medical expenses deduction.
Health Savings Accounts
CHPA strongly supports the inclusion of OTC medicines in the range of medical expenses reimbursable from health savings accounts (HSAs). Like HSAs, coverage of OTC medicines provides people with incentives to take responsibility for their healthcare and use the most cost-effective treatment options. Due to their vital role in maintaining affordable healthcare for Americans, OTCs should be granted the same tax status as other medical expenses, including coverage under health savings accounts.
While the IRS Code does not explicitly include OTC medicines in the definition of qualified medical expenses, subsequent Revenue Ruling 2003-102 makes clear the agency’s intent to include coverage of OTCs in HSAs. CHPA recommends the inclusion of the following language in legislation establishing HSA coverage. “Qualified medical expenses reimbursable from health savings account funds include over-the-counter drugs as provided in Internal Revenue Service Revenue Ruling 2003-102.”
State Sales Tax Exemptions
OTC medicines should be exempt from sales tax because they are a basic necessity and play a valuable role in maintaining affordable healthcare. While 42 of the 44 states with a sales tax currently exempt prescription drugs from sales tax, only 11 states exempt OTC medicines. CHPA is an active advocate for expanding the roster of states that recognize the value of OTC medicines through a sales tax exemption.