Tools
Get a QuoteRead About WageWorks
DID YOU KNOW
Our employees reflect the highest standards of integrity and ability and are committed to serving you. That’s the assurance you need when choosing an appropriate administrator for your plan.
Our goal is simple: to develop long-standing relationships with employers who are delighted with our expertise and administrative capacity. We will make sure you and your employees are pleased with our services.
Note: Pop-Up Windows 
Links to our PDF forms, documents, external resources and some help items are set to open in new browser windows. You may need to set your browser's pop-up blocker to accept pop-up windows for this site.
News Briefs
Many Over-the Counter Drugs Now Eligible for Reimbursement:
Is the Remedy Worth The Administrative Headache?
On September 3, 2003, the IRS issued Revenue Ruling 2003-102 (the “Ruling”). The Ruling paves the way for employer sponsored health plans to reimburse many over the counter (OTC) drugs on a tax-free basis. Prior to the Ruling, many had interpreted applicable law to provide restrict tax-free reimbursement to drugs that could only be obtained with a prescription.
Overall, the clarification that ”eligible medical expense” under Section 213(d) includes OTC drugs is a good thing for both health plan participants and plan sponsors; however, the administrative complexities associated with processing OTC claims may be enough to force even the most tolerant claims adjudicator to reach for the aspirin, ibuprofen, or other OTC painkiller. We discuss below the scope of the Ruling, the administrative complexities associated with adjudicating OTC claims, and plan design considerations for plan sponsors.
What are the facts of the Ruling?
In the Ruling, a hypothetical Health FSA participant submits a claim for reimbursement of the following items purchased without a prescription:
• Pain reliever,
• Antacid,
• Allergy medicine,
• Cold medicine and
• Dietary supplements (e.g., vitamins), which the Ruling indicates
was purchased for the general health of the participant
or dependents and not to treat specific medical conditions.
What did the IRS conclude in the Ruling?
The IRS held that the pain reliever, antacid, allergy medicine, and cold medicine were reimbursable medical care expenses; but the dietary supplements were not. The dietary supplements were not reimbursable because they were merely for the general well being of the participant and/or the participant’s dependents.
What is the legal basis for the IRS’ conclusion in the Ruling?
The IRS’ conclusion evolves around the IRS’ interpretation of the relationship between Code Section 105 (which governs tax-free benefits under employer plans) and Section 213 (which governs individual deductions for medical expenses). To understand the IRS’ conclusion, we must first understand a few fundamental principles of tax-free medical reimbursement.
Generally, Code Section 105 provides an exclusion from income for reimbursements made under an accident and health plan for “medical care” as defined in Section 213(d). Code Section 213(d) defines “medical care” broadly to include “medicine or drugs. Interestingly, regulations under Section 213 provide that the term “medicine and drugs” includes items that are legally procured and generally falling within the category of medicine or drugs (whether or not requiring a prescription). Without more, that would seem to be the end of the analysis. However, Section 213(b) excludes from the definition of medical care, for purposes of the deduction, over the counter drugs. Given the way that Section 105 works in tandem with Section 213, the general interpretation has been that if the item is not otherwise deductible, it is not reimbursable under Code Section 105.
In the Ruling, the IRS clarified (some would say for the first time) the relationship between Sections 105 and 213. According to the IRS, Section 105(b) refers only to Section 213(d), which by definition includes over the counter drugs. Section 105(b) does not specifically refer also to Code Section 213(b), which excludes OTC drugs from the definition of medical care only for purposes of the deduction, nor does Section 105 generally restrict a tax-free reimbursement under an accident and health plan to drugs that would also be deductible under 213.
Is the Section 105(b) income exclusion limited to the
OTC drugs identified in the Ruling’s hypothetical fact
pattern (e.g. allergy medicine, cold medicine, pain reliever)?
No. The Ruling applies to any OTC drugs that are for “medical care”. An OTC drug is for “medical care” if it is for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body. In addition, there has to be an “imminent probability” of disease. Therefore, items that are taken only for an individual’s general health and well-being are not reimbursable. Cosmetic items (deodorant, face cream, hand lotion, etc.) and toiletries (toothpaste, shaving lotion, mouthwash) are also not reimbursable.
Determining whether a particular OTC drug is truly for medical care as opposed to general health, cosmetic purposes or a toiletry is going to be difficult at times. Moreover, many OTC drugs may either be taken for a specific medical condition or, in other circumstances, may be for general health and well being (e.g. vitamins and other dietary supplements). To assist with sorting out which OTC drugs are reimbursable and which are not, we have attached three charts below that describe common OTC drugs. While reasonable minds can differ, the charts attempt to indicate whether specified OTC drugs are reimbursable.
The first chart lists drugs like Claritin, Sudafed, or aspirin that will almost always fall within the category of medical care. The second chart lists many OTC drugs such as vitamins or other dietary supplements that may be for medical care in some circumstances, but may also be taken for a person’s general well being. In that case, the dual purpose OTC may be reimbursable to the extent that proper substantiation is provided to show it is necessary to treat a medical condition. The third chart lists OTC drugs and other products that are not reimbursable under any circumstance because they do not fall within the category of medical care. This chart includes OTC items such as cosmetic items and toiletries and items for general well being.
Admittedly, there is a lack of clear guidance in this area. Moreover, the lines between whether items are “medicines”, for general well being, or for that matter, toiletries are at best fuzzy. Accordingly, we have also included a list (the “Your Guess is as Good as Mine List”) of hard to categorize OTCs for which further IRS guidance is sorely needed.
Since the factual situation involves only a Health FSA, does the Ruling apply only to Health FSAs?
No. The Ruling applies to any employer sponsored health plan. The specific issue addressed in the Ruling was whether employer provided reimbursement for OTC drugs is excludable from income under Section 105(b). Section 105(b) provides the income exclusion for employer provided reimbursements under any employer health plan.
What type of substantiation must be provided in order to receive
reimbursement for OTC drugs?
Although the Ruling expands the definition of medical care, it does not change the minimum substantiation requirements for accident and health plans, including Health FSAs. Generally, participants must provide a receipt or other document from the third party provider (e.g. the grocery store, the pharmacy, etc.) that identifies the following:
• the date the expense was incurred
• the specific OTC drug that was purchased
• the amount of the drug
Many receipts from the grocery store or pharmacy will not identify the OTC drug (e.g. it might just indicate that it is a pharmacy item or “drug”). The identification of the drug is necessary for the administrator to make a determination that the OTC is for “medical care.” Participants and their dependents may find it difficult to obtain a receipt identifying the purchased OTC drug. In the absence of a detailed receipt, administrators may allow participants to submit corroborating documentation (e.g., a copy of the box or product package) with identifying information that matches a line item in the receipt. For example, the participant could provide a copy of the box that identifies the name of the drug and shows the UPC code number (the number under the bars) with a receipt that has a line item with the same UPC code number.
A diagnosis of a medical condition and recommendation to take the OTC from a health care provider is not needed unless the OTC drug serves a dual purpose. Self-certification by the participant that the OTC drug was purchased to treat a specific medical condition is, in and of itself, generally insufficient to satisfy the substantiation rules. This special substantiation rule for dual-purpose OTC drugs may pose a problem for participants because OTC drugs allow individuals to self-treat without the assistance of a physician or other health care provider. Consequently, many participants will be unable to provide adequate substantiation from a health care provider. Plan sponsors and administrators should be careful to adequately explain to participants in the SPD and/or other communication material that substantiation from a health care provider is necessary where a drug has a dual purpose.
Plan sponsors and administrators should also be wary of excessive “stockpiling”. Stockpiling occurs when a participant buys a large quantity of OTC drugs (typically at the end of the plan year) often for the purpose of exhausting unused FSA funds. Is stockpiling permitted as long as the OTC drug is for medical care? Informally, the IRS has indicated that FSA reimbursement should be limited to a reasonable quantity of drugs for use during the plan year. While conceptually accurate (due to the “use-it-or-lose-it” requirement) this will be a nearly impossible standard to administer. What if a participant buys two bottles of aspirin (100 tablets each) on December 31, 2003? What if the participant buys a substantial quantity of bee sting medicine, cold medicine, and allergy medicine early in the year just to have such OTC remedies on hand? Presumably, the same concerns arise in either situation. Additional guidance is needed on this topic. In the meantime, the FSA plans should reserve discretion to the plan administrator to determine what is a “reasonable” quantity.
Can participants now take a deduction for OTC drugs that are not reimbursed under an employer plan?
No. An individual may only take a deduction on their individual tax returns drugs that are only available with a prescription.
Can participants change their Health FSA election as a result of this change?
Mid-year changes to a participant’s Health FSA election are not permitted. The mid-year allowance of OTC drugs otherwise qualifies as a “cost or coverage” change and those are not applicable to Health FSAs.
What issues should plan sponsors and administrators consider before reimbursing OTC drugs?
First, plan sponsors and administrators should answer the following questions to determine whether and to what extent to provide OTC drug reimbursement:
• Do you want to reimburse OTC drugs? In light of the substantiation issues discussed above, some plan sponsors may choose not to reimburse OTC drugs. Whether you do or don’t want to reimburse OTC drugs, you should review your plan documentation to determine whether the definition of eligible medical expenses is sufficient to accomplish your goal.
• Do you want to limit the scope of OTC drugs? In order to ease administration, some plan sponsors may limit the scope of eligible OTC drugs to those that are clearly for medical care (i.e. aspirin, Claritin). This approach will minimize the substantiation issues that would arise with a broader definition of eligible OTC drugs. Of course, a plan amendment may be necessary to properly limit reimbursement to the chosen OTC drugs.
• Are you and/or your administrators prepared to administer OTC reimbursements? The answer to this question will affect the date that you allow OTC reimbursements. You should review your administration procedures and/or have your TPA review their procedures to ensure that proper substantiation will be obtained and that the inevitable increase in the number of claims can be accommodated. What additional fees will the administrator charge to reimburse OTC medications and who will pay them?
What is the effective date of the Ruling?
The Ruling is in an interpretation of law and theoretically applies to expenses incurred before and after the Ruling so long as the plan actually allows for such reimbursement. Health FSAs, by law, cannot reimburse OTC drugs incurred in a prior plan year so reimbursement under Health FSAs is limited to expenses incurred in the current plan year.
Plans should not reimburse OTC drug expenses unless and until their plan documentation allows it. A majority of plans have specifically excluded OTC drugs and/or have defined eligible medical expenses as those that would otherwise qualify for a deduction or deductible as set forth in Publication 502 (which would, by default, exclude OTC drugs, as discussed above). In either case, a plan amendment is necessary to reimburse OTC drugs.
By the same token, a plan that generally defines eligible medical expenses as expenses that constitute “medical care” as defined by Code Section 213(d) (but does not refer to expenses that would otherwise qualify for a deduction) would not necessarily need to be amended to allow for reimbursement of OTC drug expenses. NOTE: An amendment would be necessary in this instance if the plan sponsor does not want to reimburse OTC drugs.
OTC Reimbursement Chart
The following is a listing of drugs by type (and name brand example). We have separated these OTC drugs into the following categories:
1. Medical Care: This list identifies drugs that typically fall
into the category of medical care. The participant does not need
a diagnosis of a specific condition and recommendation to take
the OTC from a health care provider in order to receive reimbursement.
2. Dual Purpose: This list identifies drugs that typically serve
a dual purpose-general health of the individual and/or to treat
a specific medical condition. Participants must have a diagnosis
of a specific condition and a recommendation to take the OTC
by a health care provider in order to receive reimbursement.
3. General Health/Cosmetic: This list identifies drugs that are
typically for the general health of the individual and/or cosmetic
drugs and toiletries. These are typically not reimbursable under
any circumstance.
4. The “Your Guess is as Good as Mine” List: This
list identifies drugs over which reasonable minds can differ.
Many of the drugs in this list potentially have a medical purpose
but it may be de minimis. Additional IRS guidance would be welcome
to help determine in which category these OTC drugs belong. We
are working with our counsel and the IRS to try and get these
into one of the other lists.
These lists are not intended to be exhaustive nor are they intended to be “the final word.” Other drugs not listed may fall into one the categories described below.
1. OTC Drugs Used Primarily for Medical Care
| These typically reimbursable with only a proper receipt. No recommendation is needed from a health care provider. | |
| Type of Drug | Examples |
| Allergy Prevention & Treatment | Benadryl, Sudafed, Actifed, Chlora Trimaton, and Nasalcrom |
| Antacids and Acid Reducers | Gas-X, Maalox, Mylanta, Tums, AXID AR, Pepcid AC, Prilosec OTC, Tagamet HB, and Zantac 75AXID AR, Pepcid AC, Prilosec OTC, Tagamet HB, and Zantac 75; |
| Anticandial | Femstat 3, Gyne-Lotrimin, Mycelrx-7, Monistat 3, 7, and Vagistat-1 |
| Antihistamines | Actidil Syrup and Capsules, Actifed, Allerest, Benadryl, Claritin, Chlor-Trimeton, Contac, Dimetane, Drixoral, Nyquil, Sudafed, Tavist-1, and Triaminic |
| Antidiarrheal and Laxatives | Ex-Lax, Pepto-Bismol, Immodium A.D. and Kaopectate |
| Anti-fungal | Lamisil AT, Lotramin AF, and Micatin, |
| Anti-itch Lotions and Creams (e.g., for athletes foot, jock itch, bug bites, poison ivy) | Bactine, Caldecort, Cortaid, Hydrocortisone, and Lanacort, Calamine Lotion, Benadryl Cream, Caladryl, Cortaid, Lamisil AT, Lotramin AF, and Micatin |
| Cold Sore/Fever Blister | Abreva Cream |
| Cough Suppressants | Robitussin, Vicks 44, Chloraseptic |
| Decongestant/ Nasal Decongestant and Cold Remedies | Advil Cold and Sinus, Afrin, Afrinol, Aleve Cold and Synus, Children’s Advil Cold, Duration, Dristan Long Lasting, Neo-Synephrine- 12 Hour, Orrivin, Sudafed, Tavist-D, Tylenol Cold and Flue, Thera-flu, Alka Seltzer Cold and Flu, Nyquil, Actidil Syrup and Capsules, Actifed, Allerest, Benadryl, Claritin, Chlor-Trimeton, Contac, Dimetane, Drixoral, Sudafed, Tavist-1, and Triaminic |
| Diaper Rash Ointments | Balmax and Desitin |
| Eye Drops for Allergy/Cold Relief | Ocu Hist |
| Hemorrhoid Treatments | Preparation H, Hemorid, and Tronolane |
| Internal Analgesic/antipyretic | Advil, Aleve, Children’s Motrin, Nuprin, Excedrin, Tylenol, Bayer, |
| Menstrual Cycle Medications | Midol, Pamprin, and Premysyn PMS |
| Migraine | Advil Migraine Liqui-gels, Excedrin Migraine, Motrin Migraine Pain, |
| Motion Sickness Medication | Dramamine and Marizine |
| Nicotine Gum or Patches and Smoking Cessation Aids | Nicorette, Nicotrol, and Nicodin |
| Pediculicide (head lice) | Nix |
| Poison Ivy Protection | Ivy Block |
| Smoking Cessation | Commit, Nicoderm CQ, Nicorette, Nicotrol, |
| Toothache and teething pain relievers | Orajel |
2. Dual Purpose OTC Drugs
| Permissible with Physician’s Note Listing Diagnosis of a Medical Condition and Recommendation of OTC Drug |
| Anti-baldness/hair loss/ hair replacement/ such as Rogaine, but only if to replace hair loss due to a medical condition and not for balding due to age. |
| Dandruff shampoo or other medicated shampoo such as Denorex, Head and Shoulders to treat a specific medical condition like psoriasis and only the amount in excess of the cost of normal shampoo. Many plan sponsors may exclude completely to avoid having to determine whether the cost of the dandruff shampoo exceeds the cost of regular shampoo. |
| Dental fluoride treatments, special mouthwashes, or treatments for gingivitis |
| Fiber supplements such as Benefiber and Metamucil |
| Glucosamine/chondrotin for arthritis or other medical condition (not reimbursable if taken for overall joint health |
| Herbal supplements used to treat a specific disease such as St. John’s Wort for depression |
| Nose strips for proper breathing or other medical conditions |
| Retin-A and other acne medicines (not reimbursable if used for cosmetic purposes such as wrinkle reduction) |
| Snoring cessation aids and medications such as Breathe Right Spray, Snorezz |
| Weight loss/dietary supplements must be for a specific medical condition such as obesity |
3. OTC Drugs Primarily Not Reimbursable
| OTC Drugs or other products that are not for Medical Care |
| Deodorants |
| Face creams, moisturizers, eye creams, and wrinkle reducers |
| Hair removal treatments and waxes |
| Mouth washes, antiseptics and oral anesthetics |
| Teeth Whitening kits, and powders |
| Toothpaste |
| Vitamins taken to improve overall-health |
4. The “Your Guess is as Good as Mine” List
| This list represents OTC drugs that could arguably fall into categories 1-3 but we are not sure which category. | |
| Type of Drug | Comments |
| Creams for joint and muscle pain such as BenGay and Flexall | Typical use is to alleviate muscle and joint pain/soreness. May also be used for general health. Does it fall into “Dual Purpose” or “Primarily for Medical Care”? |
| Wart removal medications | Is this for cosmetic purposes or is being used to alleviate a medical condition? While the cause of warts may be viral, is the removal primarily cosmetic? |
| Pedialyte for a child’s dehydration | At one time, this was available only by prescription. Currently, this OTC product is used as a drinking product for children much like Gatorade. Is this a dual purpose OTC or primarily medical? |
| Clearasil (or other products used solely to treat acne) | Acne is a medical condition; however, some argue this is for cosmetic purposes unless it is for chronic acne. Others argue that acne is a medical condition whether chronic or isolated; therefore, Clearasil and other similar products would be for medical care. |
| Sunscreen | Arguably, sunscreen prevents cancer and “prevention” is one of the core elements of the definition of medical care. However, unless the individual had or has skin cancer, there is no imminent probability of disease (and is comparable to toothpaste in that it is for maintenance) |
| Chapstick | Some would argue that this is cosmetic. However, medicated chapstick is used to treat chapped and broken lips, which is arguably a medical condition. Is this solely for cosmetic purposes or does it fall into the dual purpose drugs? |
| Cough drops | In a manner similar to pedialyte, cough drops have become tantamount to a candy. This could fall into primarily medical, dual purpose or not reimbursable as a general health item. |
| Sleep-Aid | Is the inability to fall asleep a medical condition or would sleep aids only be reimbursable if they were recommended by a physician to treat a specific medical condition (e.g. sleep apnea)? |
| Visine | Does Visine treat a medical condition or is this general well being and/or cosmetic? |
For more information
For more information on our services, or to request a proposal, call us toll-free at 1.866.602.3887 or email partnerdev@wageworks.com.