Flexible Spending Accounts Tax Benefit

Taxpayers with flexible spending accounts might see their after-tax medical costs decline. The IRS recently announced that the cost of nonprescription drugs can be reimbursed by flexible spending accounts.

Flexible spending accounts reimburse account holders for medical costs that are not covered by insurance. An employee has a portion of salary deposited into the account, and that amount is not included in gross income for income tax purposes. The employee can get reimbursed from the account for qualified expenses, and those reimbursements also are tax free.

Previously only expenses that qualified as deductible medical expenses if paid directly by the taxpayer qualified for FSA reimbursements. Such reimbursements included eyeglasses, prescription drugs, copayments, and deductibles. Now, the IRS is expanding the list to include nonprescription drugs.

This move could be a big benefit to employees who regularly use over-the-counter medication for allergies, heartburn, and pain relief. Using an FSA to make the purchases could drop the after-tax cost by 30% or more. It also will prove to be a benefit because a number of prescription medications are being reclassified as nonprescription drugs.

The change also helps overcome the use-it-or-lose-it feature of FSAs. Now, as the year end approaches, you can stock up on nonprescription medicines so the unused balance in an FSA won’t be lost.

A flexible spending account is available only if an employer chooses to offer the benefit to employees. The employer can put additional limits, such as minimum reimbursement amounts, on the plan.