The Internal Revenue Service has issued guidance explaining the coming sanctioned changes to the definition of a “qualified medical expense” paid by a Health Savings Account (HSA) and other tax-favored arrangements. The other arrangements include a health Flexible Savings Account (FSA), a Health Reimbursement Account (HRA) and an Archer Medical Savings Account (MSA).
The changes that go into effect Jan. 1 are a result of the Patient Protection and Affordable Care Act, enacted in March by President Barack Obama, which established a new uniform standard for healthcare costs. The changes were announced Sept. 3.
Under the new standard, in order for a medicine to be considered a tax-free “qualified medical expense,” the individual must obtain a prescription. Any cost incurred for over-the-counter medicine purchased without a prescription will be treated as a nonqualified medical expense and subject to additional tax.
An exclusion to this rule is insulin, which can be obtained without a prescription and still remains a qualified medical expense. In addition, the change does not affect other healthcare expenses, such as medical devices, eyeglasses, contact lenses, co-pays and deductibles.
While HSA holders are already required to furnish a prescription for over-the-counter medicines, health FSA and HRA debit-card users are in for a change. Since the current debit-card systems cannot verify that medicines were prescribed, starting on Jan. 1, account holders will no longer be able to use health FSA or HRA debit cards to pay for their over-the-counter medicines.
Since implementation of the new rules will require significant changes to the existing debit-card systems, the IRS has stated that it will not challenge the use of health FSA and HRA debit cards for expenses incurred through Jan. 15.
The new definitional change does not affect HSA, health FSA, HRA and Archer MSA distributions for medicines made before Jan. 1, or HSA and Archer MSA distributions made after Dec. 31 for medicines purchased on or before that date.
The IRS indicated that it intends to amend Reg. §§1.105-1, 1.105-2, 1.106-1, 1.125-1 and 1.125-5 to provide for the new definition of medical expenses.