A Tax Fact from The Tax Institute at H&R Block

Next time you’re fighting a cold at your local pharmacy, save those receipts. You can get reimbursed for over-the-counter medicine through employer-sponsored flexible spending accounts, or “cafeteria plans.”

Consider it a “Get Well” wish from Congress.

Medical flexible spending accounts allow employees to pay for certain medical costs with pre-tax dollars. In the past, most plans limited reimbursable expenses to items eligible for the medical expense deduction on your tax return – which at one time excluded non-prescription drugs. But not anymore.

So how much will you save if you have a cafeteria plan? If you are reimbursed for $100 of non-prescription drugs through your flexible benefit plan, you’ll save between $20 and $40 a year.

To be an eligible expense, the over-the-counter medication must treat a medical condition, rather than merely contributing to your general well being. Eligible items include pain relievers, antacids, allergy medicine and cold medicine. Dietary supplements like vitamins and weight loss aids like alli are not qualifying expenses.

So, why is this tax benefit offered? Many drugs that used to be available only with a prescription can now be bought over-the-counter. Once these drugs are available without a prescription, many health plans quit covering their cost. The allergy drug Claritin is a good example.

And while over-the-counter drugs cost less than prescription drugs, the cost to consumers increases because the counter price is often greater than their co-payment was when it was covered by insurance.

When making a cafeteria plan election, carefully gauge how much you want to earmark for prescription drugs as well as your out-of-pocket co-pays. Think about your needs annually for eyeglasses and contacts. Also consider any additional dental work that may not be covered completely by your dental plan.

Remember, however, that cafeteria plans have a “use it or lose it rule,” meaning you lose any funds leftover at the end of the year.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.