Academic journal article Journal of Accountancy

Excluding Over-the-Counter Drug Reimbursements: Make Medical Reimbursements Less of a Headache

Academic journal article Journal of Accountancy

Excluding Over-the-Counter Drug Reimbursements: Make Medical Reimbursements Less of a Headache

Article excerpt

Revenue ruling 2003-102 held that an employee's receipt of a reimbursement from an employer-sponsored health flexible spending arrangement (health FSA) under a cafeteria plan, health reimbursement arrangement or other employer health plan for over-the-counter (OTC) drugs is excludible from gross income under IRC section 105(b); however, amounts an employee pays for dietary supplements are not reimbursable or excludible, nor can the individual deduct such costs as section 213 medical expenses. CPAs should familiarize themselves with this ruling to educate eligible clients.

FACTS

N sponsored a health FSA that reimburses participating employees for medical care costs not covered by other insurance. Participating employee A purchased an antacid, an allergy medicine, a pain reliever and a cold medicine from a pharmacy without a prescription to treat personal injuries or sickness and also bought dietary supplements without a prescription to maintain general health and submitted substantiated claims for these expenses to N's plan.

ANALYSIS

Generally under section 105(b), an individual excludes from income amounts reimbursed for medical care costs. Under regulations section 1.213-1(e)(1)(ii), an expenditure for an individual's general health is not a medical care expenditure. Further, the costs of "medicines and drugs" (defined by regulations section 1.213-1(e)(2) as "items ... legally procured and generally accepted as falling within the category of medicine and drugs") are medical care expenditures, but the costs of toiletries, cosmetics and sundry items are not; see regulations section 1. …

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