What Was Obamacare’s Medicine Cabinet Tax?

The “medicine cabinet tax” is a colloquial name for a provision within the Patient Protection and Affordable Care Act (ACA) of 2010. It was not a direct tax on consumers, but a change in the rules for tax-advantaged health accounts that altered what qualified as a medical expense. This directly impacted how people could use funds from their health savings accounts.

The rule change specifically targeted over-the-counter (OTC) medicines. Before the ACA, individuals could use pre-tax dollars from accounts like Flexible Spending Accounts (FSAs) to buy these items without authorization, but the new regulation ended this practice.

The Original Rule Under the ACA

The provision stipulated that the costs of over-the-counter medicines could not be reimbursed from a tax-advantaged health account unless the consumer obtained a prescription. This meant that for an individual to use their pre-tax funds for common ailments, they first had to incur the time and expense of a doctor’s visit. This rule applied to Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), and Archer Medical Savings Accounts (MSAs).

The practical effect was a reclassification of many everyday health products as non-qualified medical expenses for these accounts. This included a wide array of products such as pain relievers, cold and flu remedies, allergy medications, and digestive health products like antacids. The change was intended to generate federal revenue to help offset the costs of the broader healthcare law. The rule went into effect on January 1, 2011, changing how millions of Americans used their health benefit accounts for nearly a decade.

The Repeal and Current Eligibility

The “medicine cabinet tax” was repealed on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislative change eliminated the ACA’s prescription requirement for purchasing over-the-counter medicines with funds from tax-advantaged health accounts. The repeal was made retroactive to January 1, 2020, allowing individuals to seek reimbursement for any eligible OTC products purchased since the beginning of that year.

The CARES Act went a step further by expanding the definition of qualified medical expenses. A major expansion was the inclusion of menstrual care products. Items such as tampons, pads, liners, and menstrual cups became qualified medical expenses eligible for purchase or reimbursement through a health savings or spending account.

In response to the COVID-19 pandemic, the IRS clarified that the costs of personal protective equipment (PPE) for the primary purpose of preventing the spread of the virus are also treated as eligible medical expenses. This includes items like face masks, hand sanitizer, and sanitizing wipes.

How to Get Reimbursed for Eligible Items

Using your tax-advantaged funds for the expanded list of eligible items is a straightforward process. Most plan administrators offer a debit card linked directly to the FSA or HSA. This card can be used at the point of sale at pharmacies, supermarkets, and online retailers that have an inventory information approval system (IIAS), which automatically identifies eligible items at checkout.

If you do not use a dedicated debit card or if a purchase is not correctly processed, you will need to pay for the items out-of-pocket and submit a claim for reimbursement. This process requires an itemized receipt from the retailer that clearly shows:

• The merchant’s name
• The date of the purchase
• The specific name of the product purchased
• The amount paid

After making the purchase, you will need to complete a claim form provided by your FSA or HSA administrator, which is often available through an online portal. You will then submit this form along with a copy of the itemized receipt. Administrators review the claim to ensure the items are eligible before issuing a reimbursement via direct deposit or a check.