Prescription and taxesThe IRS recently released guidance on tax changes in 2011 that will affect Flexible Spending Arrangements (FSAs). These arrangements are also known as Flexible Spending Accounts which provide tax advantages for taxpayers because they usually can pay for medical expenses with income that was not subject to payroll taxes. Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) will also be impacted.

Obama’s Affordable Care Act, passed this year, does not allow Over the Counter (OTC) prescriptions to be paid for with an FSA in 2011, unless a doctor’s prescription is obtained. The good news is that anyone utilizing insulin, does not need a prescription in order to be reimbursed. Furthermore, health insurance deductibles, doctor co-pays, glasses, contacts, bandages, blood sugar devices and other medical devices are not affected by this change. If you purchase OTC prescriptions this year, but are reimbursed after the New Year you will not be affected by these changes. Only purchases made in 2011 are impacted.

If you utilize an HSA or FSA, hopefully your employer will notify you of these changes. If you try to submit a claim for OTC prescriptions, you will have your claim rejected. Those who break the law with a withdrawal could be audited.

Many more changes such as capping FSA contributions to $2,500 will take effect in 2013 if no legislation comes into play. There currently is no cap on FSA contributions, though employers normally set limits around $5,000.

What is your opinion on this? It can be argued that this change prevents taxpayers using FSAs, HSAs, and other medically related tax savings accounts from abusing OTC prescriptions and it helps raise tax revenue.

However, this will negatively impact those taxpayers (in a bad economy too) who legitimately benefit from the current law that take OTC prescriptions for allergies, cold medicines, antacids, pain relievers, laxatives, sleeping medication and so on. For example, those who have allergies that tax such prescriptions as Zyrtec, Claritin, Benadryl, and so on now have to purchase these prescriptions with after tax dollars unless they get a prescription or go see a doctor for a prescription (which is generally is a cost in and of itself).