Flexible spending accounts (FSAs) allow employees to set aside a designated amount of pre-tax money each year that they can withdraw to pay medical expenses not covered by insurance, such as doctor co-payments, deductibles, prescription drugs, eye exams, chiropractor visits and dental work. Many people don't know that over-the-counter drugs are also included on this list.

This is an important benefit for people who have seen their prescription drugs move to the over-the-counter market. The benefit of buying the drug without a prescription is made even sweeter by using FSA pre-tax dollars.

What qualifies?
Some examples of qualifying nonprescription drugs are antacids, allergy medicines, pain relievers and cold medicines. Non-qualifying items include cosmetics, toiletries such as toothpaste, general dietary supplements and other products that are "merely beneficial to the employee's health," according to the IRS.

FSAs faced criticism because of their use-it-or-lose-it format. Because principals automatically forfeit money remaining in the account at year's end, many employees have found these plans too risky.

Including over-the-counter drugs in FSAs makes the use-it-or-lose-it format a little less intimidating. If participants have more money in their account at year's end than anticipated, they can purchase needed over-the-counter medications. The IRS, however, has recently granted FSAs a grace period that allows reimbursement for expenses incurred up to 2 ½ months after the plan's year end.

Will debit cards ease paperwork?
Another drawback to FSAs is the reimbursement process. Participants must pay for the medicine or service and then submit the receipt to request reimbursement. Most employees fund FSAs by a payroll withdrawal from their paycheck. So until they are reimbursed, they are essentially paying the expense twice.

Nonprescription drugs are no different, and paperwork is still required to process a reimbursement. To substantiate a claim, participants must put the drug name (such as Tylenol® or Claritin®) and purchase date on the receipt.

But a recent IRS ruling could change this paper-intensive reimbursement system. Many companies are starting to use a debit card format for their FSAs. With the new format, the employee presents an employer-sponsored debit card when purchasing a qualified medicine or service. The claim is sent to the plan administrator, where it is substantiated and the money is then deducted from the FSA.

Time to add this benefit?
Implementing IRS rules relating to FSAs can cause headaches. If you have any questions please give us a call.