The IRS issued a bulletin last Friday saying effective January 1, 2011, over-the-counter drugs will not be covered under a Flexible Spending Account (FSA), Health Savings Account (HSA) or Medical Savings Account (MSA) unless you get a prescription. Eye glasses and contact lenses will still be covered. This change is brought by the health reform law passed earlier this year.
Because getting a prescription for your typical over-the-counter drugs is more trouble than its worth, this effectively ends the small tax break of paying for these drugs with pre-tax money. That by itself isn’t a big deal but it also takes away a tool for managing the use-it-or-lose-it problem in an FSA. Under the current rules, if you are getting to the end of the year (or March 15 in some plans) and you still have some money in your FSA, you can spend it down on some OTC drugs. Starting in 2011, you won’t be able to do that.
The use-it-or-lose-it rule for the FSA is really a pain. They should really get rid of it.