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September 11, 2003

IRS rules flexible spending funds can pay for over-the-counter drugs

Staff and faculty soon may be able to use the pre-tax dollars in their Pitt flexible spending accounts to pay for non-prescription drugs.

The Internal Revenue Service (IRS) and the U.S. Treasury Department announced Sept. 3 that “over-the-counter drugs can be paid for with pre-tax dollars through health care flexible-spending accounts.”

These accounts, which are overseen by employers including Pitt, allow employees to set aside a pre-determined amount of money each year and apply it as pre-tax dollars to cover non-insured health care costs, such as medical deductibles and co-payments.

But the University’s benefits manager cautioned that Human Resources (HR) still is reviewing the new regulations “and nothing is definite yet.”

Nancy Gilkes said: “We just received the notices [from the IRS] and our upper management and counsel are reviewing them. It is likely that once that review takes place, HR will issue a statement of information about changes, if any.”

Prior to the Sept. 3 ruling (Revenue Ruling 2003-102), non-prescription drugs were not covered under Pitt’s flexible spending plan.

Under Pitt’s optional employee flexible spending plan, participants must sign up during the benefits open enrollment period, held each spring. Flex plan enrollees commit to having a set amount deducted in each paycheck up to an annual maximum of $5,000.

Under federal law, any money remaining in the flexible spending account at the conclusion of the designated annual timeframe (currently, July 1, 2003 – June 30, 2004) is forfeited.

According to the IRS/Treasury announcement, the ruling was intended to clarify tax laws already in effect.

“Flexible Spending Accounts were established under the tax code to provide incentives for better health care,” said IRS Commissioner Mark W. Everson in the prepared statement. “This action is a sensible expansion and simplification of the program consistent with existing law.”

In presenting the rationale behind the new ruling, the IRS pointed out that, increasingly, drugs are becoming available without prescription.

“Many health plans no longer cover the cost of these drugs as over-the-counter,” the IRS said. “While an over-the-counter drug is less expensive than the prescription drug, the cost to many consumers increases because the price paid by the consumer for the over-the-counter drug is greater than the co-payment by the consumer when the drug was covered by insurance.”

According to the IRS, non-prescription drugs such as pain relievers, cold medications, allergy medicines and antacids now qualify for pre-tax flexible spending dollars.

However, dietary supplements, vitamins, cosmetics and toiletries do not qualify under the new regulations.

Moreover, non-prescription drugs remain ineligible for tax deductions as itemized medical expenses, the IRS said.

—Peter Hart                     


Filed under: Feature,Volume 36 Issue 2

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