Pretax Plans Now Cover Antacids

The Internal Revenue Service said Wednesday that the cost of nonprescription medicines qualified for reimbursement from flexible spending accounts and other pretax health-care plans.

IRS officials said the announcement in part reflects the increasing number of onetime prescription drugs that are now sold over the counter. While such a shift typically lowers the price of a drug, it may increase out-of-pocket costs because insurance no longer pays for it.

“Flexible spending accounts are an important tool in helping people meet their health-care costs,” Treasury Secretary John W. Snow said in a prepared statement. “Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow.”

“Employees will be thrilled,” said Karen Frost, a benefits consultant with Illinois-based Hewitt Associates LLC.

Under Wednesday’s ruling, which is intended to clarify existing law, such nonprescription drugs as antacids, allergy medicines, pain relievers and cold medicines purchased without a doctor’s prescription will qualify for reimbursement. But cosmetics, toiletries such as toothpaste, and dietary supplements that merely contribute to overall health do not qualify.

Flexible spending accounts, which are run by employers, allow employees to put aside a specified amount of money each year before taxes and withdraw it for health-care costs not covered by insurance. The effect is to reduce the cost of the drugs and other medical services, because of the pretax feature.

But the accounts have two unpopular drawbacks.

First, and most important, workers lose any money that remains in their accounts at year’s end. That makes it a costly mistake to overestimate expenses, a risk many employees are unwilling to take, Frost said.

Second, participants usually must pay for a medicine or service and submit paperwork to be reimbursed. A ruling by the IRS this year may ease that problem. The agency approved debit-like cards that may be used without further documentation under some circumstances, such as for a co-payment in a doctor’s office. In other cases, such cards may be used to make payments, but the employees must submit follow-up paperwork.

Frost said she expects the combination of the two IRS rulings to promote the use of flexible spending accounts.