Tax-Favored Accounts

Health Care Reform is has brought many changes to the way Tax-Favored Accounts work.  Effective January 1, 2011, OTC medicines and drugs were no longer eligible for reimbursement under a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) without a valid physician's prescription.

Penalties for non-qualified distributions from a Health Savings Account (HSA) and a Medical Savings Account (MSA) participants increased in 2011 from 10% to 20%. This means that if you, your spouse or dependent use money from your HSA/MSA for an ineligible expense, the distribution is included in your gross income and is subject to a 20% tax penalty. So be careful when managing your HSA/MSA expenses to ensure all your expenses are eligible under your plan.

The new health care law capped an employee's contribution to a Medical FSAs. Effective in 2014, all Medical FSA employee contributions are limited to $2,500. Employers have the discretion to set the cap lower if they wish.


Effective January 1, 2011, Over-the-Counter (OTC) drugs and medicines are no longer eligible for reimbursement under an FSA or HRA without a prescription from your attending provider. This includes OTC items like:

  • digestive aids 
  • allergy drugs
  • pain relief
  • cold and cough medicines
  • sleep aids
  • anti-gas meds
  • baby rash creams
  • insect bite treatments.

Items like eyeglasses, wrist splints and band aids, as well as durable medical items such as crutches and canes, will continue to be reimbursed without a doctor’s prescription.

If you wish to continue purchasing and submitting claims for tax-free OTCs you must obtain a doctor’s prescription for the items you want reimbursed.



This article is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that FBMC is not rendering professional or medical advice and assumes no liability in connection with its use.


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