Washington (Sept. 4, 2003) --Over-the-counter drugs can now be paid for with pre-tax dollars through health care flexible spending accounts, according to new guidance issued by the Treasury Department and the Internal Revenue Service.

The guidance clarifies that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee.

"Flexible Spending Accounts are an important tool in helping people meet their health care costs," stated Treasury Secretary John Snow. "Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow."

Drugs are increasingly becoming available over-the-counter without prescription. Many health plans no longer cover the cost of these drugs as over-the-counter. 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. This is especially an issue for individuals who remedy chronic health problems by regularly taking an over-the-counter medicine.

However, for purposes of the itemized medical expenses deduction, the cost of such over-the-counter drugs continues to be non-deductible. In addition, the cost of dietary supplements that are merely beneficial to the employee's health are not excluded from income.

-- WebCPA staff

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