FSA's and prescriptions for OTC meds

For years now, part of my health coverage includes a flexible spending account (FSA). Since '03, over-the-counter drug purchases have been eligible for reimbursement. They still are, but because of the big health care bill that passed last year, a prescription from my doctor is now required in order to reimbursed for these expenses. It’s added a layer of hassle for me, and no doubt it’s also added a paperwork burden for my doctor’s office and for the people who manage my FSA.

So why are prescriptions being required now?

A cynical/conspiratorial theory is that the government wishes to make it such a pain in the ass to obtain reimbursement for OTC meds that frustrated patients will simply stop/lower their contributions to FSA’s, resulting in more taxable income - and therefore more tax revenue for the government.

An idealist theory is that this is an attempt to reduce fraud. The only kind of fraud I can think of is using one’s FSA to buy meds for a friend who doesn’t have an FSA. In theory, requiring a prescription should put an end to this - except the prescription process that was put into place at my doctor’s office doesn’t require an in-person visit to confirm whether you need the meds or not, so you can pretty much put whatever you want on the prescription request. Moreover, the amount of money involved here is trifling, and doesn’t seem to justify the storm of administrative work that is surely being required to manage this prescription program. Hypothetically speaking, If I buy a $5 bottle of Advil for a friend who doesn’t have an FSA, and he reimburses me for that $5, then the government loses out on, what, $1.25 in tax revenue?

So what’s the scoop? Why are OTC med prescriptions now being required for FSA reimbursement?

Asking why Congress does anything is rarely going to get you anywhere. Legislation is not a rational process.

Anyway, the way I think of it, and the way I explain it to clients, is that the change makes FSA (and HSA) deductions more equivalent to Sch A line 4 medical deductions. Sch A has always required a prescription for OTC products. It’s only the old HSA and FSA definitions that made OTC products reimbursable (and, thus, technically deductible). I used to strongly recommend HSA plans precisely because of this.

From a cynical standpoint… several provisions of the health care act make it harder to deduct medical expenses. Not only are there more restrictions on FSA/HSA reimbursements, but there will be an increase in the Sch A line 3 floor from 7.5% of AGI to 10% of AGI. These do two things:

  1. Encourage you to get insurance plans that pay for everything
  2. Raise additional revenue to pay for the costs of the health care program.

There is nothing cynical/conspiratorial about it. The section of the law that made the change was titled “Title IX - Revenue Provisions, Subtitle A - Revenue Offset Provisions”. Clearly the intent is to raise more money.

It was only a few years ago that OTC meds were even allowed to be run through the FSA, so this is a step back to that status quo. I don’t think there’s any fraud prevention, per se, though I guess it might cut down on tales I’ve heard of people buying a lot of OTC stuff (contact lens solution and the like) to submit for reimbursement, then returning the stuff afterward. There are still plenty of things you could do that with, however.

More annoying: in 2013 or so, the max amount you can set aside will be slashed to 2,500 dollars. Note that right now there’s no legal maximum, but most employers limit it to about 5,000 (mine is 5,100, for some reason) because of their exposure to employees who use up a bunch early in the year, then leave the company. There’s no requirement that they pay that back.

Re: abuse of the system

One year a friend of mine found himself with something like $500 in his FSA at the end of the year. He used the funds to buy his friends nifty J&J First Aid Kits (not the little pocket ones, either, the big ones!) for Christmas.

I gladly took mine with thanks, but yeah, that’s not really the way the FSA is meant to be used!