To be reimbursable, over the counter (“OTC”) items must be for “medical care,” as defined under Internal Revenue Code §213(d). Medical care expenses are amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body. Health savings accounts (“HSAs”), full and limited purpose health flexible spending accounts (“FSAs/LPFSAs”) and health reimbursement arrangements (“HRAs”) may provide tax-free reimbursements of certain OTC items. OTC items are generally available to consumers without a prescription.

Employer Action Items

• Employers that sponsor HSA-compatible health plans should implement a Limited Purpose FSA.
• Employers may want to remind employees that HSA funds can be used to pay for OTC medical care expenses on a tax-free basis.
• Employers with health FSAs and HRAs can design their plans to limit the types of OTC items eligible for reimbursement. Any such limits should be communicated to participants.

Summary

Prior to 2020, the Affordable Care Act (“ACA”) prohibited health FSAs, HRAs and HSAs from reimbursing the costs of OTC medicine and other drugs on a tax-qualified basis, unless prescribed by a healthcare practitioner. However, effective January 1, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) eliminated the ACA’s prescription requirement and allowed OTC drugs, along with menstrual care products, to be treated as qualified medical expenses payable via utilization of tax-advantaged dollars arising in connection with the funding of such account-based products.

To be reimbursable, an OTC item must be for “medical care,” as defined under Internal Revenue Code §213(d). Medical care expenses are amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body.

Payments for medicine and/or drugs qualify as medical care expenses, regardless of whether the item is available without a prescription (that is, an OTC item) or if it requires a prescription from a healthcare practitioner. However, only items that are legally procured and generally accepted as being medicine and/or drugs qualify as reimbursable medical care expenses.

Expenses for OTC items (other than medicines or drugs) may qualify as medical care only if they are “primarily for” the prevention or alleviation of a physical or mental defect or illness. Expenses that merely benefit general health, on the other hand, are considered personal expenses and will not qualify as medical care expenses (such as medical concierge fees)

The “But For” Test

For any such expense to be deemed for the provision of medical care, it must be established that the expense would not have been paid “but for” the disease or illness. That is, the item is not for medical care if the individual would have paid for it even without a medical condition.

Personal and Medical OTC Items

The IRS has released guidance specifically addresses several items (other than medicine or drugs) that may be both personal and medical in nature, as well as items that are generally used only for medical care. In addition, the IRS has provided a set of frequently asked questions (FAQs) addressing whether certain costs related to general health, nutrition, and wellness are medical expenses that can be paid or reimbursed by an HSA, full or limited health FSA or HRA.

Personal Items as Medical Care

Certain items may qualify as medical care or may be personal items, depending on how they are used. For example, a person may use these items to maintain general health, or as toiletries or cosmetics (such as face creams, deodorants, perfumes, shampoos or toothpaste). These are personal uses. However, if it can be shown that the item is used to treat or alleviate a disease or injury, and satisfies the “but for” test, the item may qualify as a medical care expense.

Medical Care Only Items

Items that have no purpose other than to treat a disease, illness, or mental or physical defect may qualify as medical care. Treatments for the following conditions will most likely qualify as medical care: acne; incontinence; arthritis; constipation; colds; sinus problems; dehydration; and indigestion.

The following items are likely to qualify as medical care:

• Support braces and shoe inserts for injured or weakened body parts;
• Products that have no purpose but to treat existing skin conditions such as eczema (as opposed to products that are designed to prevent the development of the condition); and
• Wheelchair cushions necessary to a wheelchair.

Additional Resources

The federal definition of “medical care” – Code §213(d).

Which OTC items qualify as medical care expenses – IRS information letter from 2009.

OTC drugs and menstrual care products to be treated as qualified medical expenses under the CARES Act.