By Ric Joyner, CEBS, GBA, CFCI
I was answering questions regarding HSAs, and many brokers (to my amazement) were telling clients that they COULD NOT pre-tax over-the-counter meds (OTC) because it was not in publication 502!? I took the challenge, and read publication 502 (great poolside read BTW).
Note publication 502 handles the medical related items for IRS Code Section 213d, HSAs, HRAs, FSAs use this code to reimburse expenses.
To my shock, OTC is not listed. I scoured the document from many different angles, with no mention of OTC. I inserted an excerpt regarding medicines from 502.
You can include in medical expenses amounts you pay for prescribed medicines and drugs. A prescribed drug is one that requires a prescription by a doctor for its use by an individual. You can also include amounts you pay for insulin. Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed.
If you imported medicines or drugs from other countries, see Medicines and Drugs From Other Countries, under What Expenses Are Not Includible, later.
Source: IRS Publication 502 (HTML) retrieved at 2:48 pm 4-17-08
IRS Weighs In on Why OTC is not Mentioned in Pub 502
I emailed my contact at the Treasury and asked why OTC was not mentioned in 502. His response was:
"It is not listed in Pub 502 because that list concerns only amounts deductible on schedule A of Form 1040 and only prescription drugs are deductible. The over-the-counter provision is in IRS guidance; Rev. Rul. 2003-103. Harry Beker, Chief Counsel IRS
I think this is an interesting opportunity. First, most practitioners (TPAs, Banks, Associations, Blogs) send their clients to publication 502 for information regarding what is eligible to be reimbursed from HSAs, HRAs, FSAs. As I see it, we must ask two questions. 1. What plan are you going to file under HSA, FSA, HRA or a personal return with out one of the pre-tax plans? 2. And what type expense? (the answer should drive where to send the clients).
If it is for OTC, then we go to Revenue Ruling 2003.102. For personal returns we send them to 502. For general expenses 502 will accomplish the task.
Second, regarding opportunity. When we hear an employee or employer state, "Why do I need an HSA (or other product) to fund these expenses?" We respond, "Because you won’t get a 100% tax break if you try to file on your 1040 taxes, AND you can’t take over-the-counter, unless you are in one of the pre-tax plans!
Thus, the average tax payer does not get OTC (502) unless they are in an HRA, HSA, FSA and then must use RR 2003.102. That is a major selling point for one of the pre-tax plans.