Who Qualifies for Over-the-Counter Benefits?

Over-the-counter (OTC) items, when purchased with funds from tax-advantaged accounts like Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), can offer significant financial advantages. Understanding which items qualify and who is eligible to use these accounts is important for effective financial planning. Leveraging these benefits allows individuals to pay for common health products with pre-tax dollars, potentially reducing overall healthcare costs.

Eligible Over-the-Counter Items

An eligible over-the-counter item refers to products that address a medical condition without requiring a prescription. These items are recognized by the Internal Revenue Service (IRS) as medical expenses. The Coronavirus Aid, Relief, and Economic Security (CARES) Act significantly expanded the list of eligible OTC items in 2020, allowing many common health products to be purchased with tax-advantaged funds without a doctor’s note.

Common categories of eligible OTC items include pain relievers, such as ibuprofen or acetaminophen, and various cold and flu remedies like decongestants and cough suppressants. Allergy medicines, antacids, and certain digestive aids also qualify. First-aid supplies, including bandages, antiseptic wipes, and gauze, are covered. These products directly address specific ailments or injuries, making them eligible medical expenses.

The CARES Act also included menstrual care products, such as tampons, pads, and liners, as eligible medical expenses. Certain diagnostic tools, like blood pressure monitors, glucose meters, and thermometers, are eligible because they are used to monitor or diagnose a health condition. Sunscreen with an SPF of 30 or higher and certain contact lens solutions also qualify.

While many OTC items are eligible without a prescription, some general health or hygiene-related products may still require a doctor’s note. For instance, items like toothbrushes or general vitamins might not qualify on their own if not primarily for a medical condition. The IRS guidance emphasizes that an expense must be for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Verify eligibility or obtain a doctor’s note for less obvious items.

Individuals Qualified to Use Tax-Advantaged Funds

Individuals can access funds for eligible over-the-counter items through tax-advantaged accounts such as Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and sometimes Health Reimbursement Arrangements (HRAs). Each account type has distinct eligibility requirements and rules. Understanding these differences is important for determining which option best suits an individual’s financial and healthcare situation.

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts (FSAs) are employer-sponsored and funded through pre-tax payroll deductions. Employees elect an amount to contribute at the beginning of the plan year, and these funds can be used for eligible medical expenses, including OTC items. FSAs have a “use-it-or-lose-it” rule, meaning most unused funds are forfeited at year-end. Some plans may offer a grace period (up to 2.5 months) or allow a limited amount (e.g., up to $640 for 2024) to be carried over. FSAs are not portable if an individual leaves their employer and do not offer investment options.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer flexibility and ownership, but eligibility is tied to enrollment in a High-Deductible Health Plan (HDHP). Both individuals and employers can contribute to an HSA, and contributions are tax-deductible. Funds roll over year to year, are portable, and can be invested, allowing the account to grow tax-free. Withdrawals for qualified medical expenses, including OTC items, are also tax-free, making HSAs a tool for long-term health savings.

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) are solely employer-funded and employer-owned accounts. Employees cannot contribute to an HRA, and the employer sets the rules for eligible expenses and fund rollovers. HRAs are not portable, meaning the funds remain with the employer if an individual leaves their job. While HRAs can be used for eligible medical expenses, including OTC items, their terms depend on the employer’s plan design.

The choice between these accounts depends on factors such as employment status, health plan enrollment, and individual financial goals. For instance, an HSA provides long-term savings potential and investment growth, appealing to those with an HDHP who save for future medical costs. An FSA offers immediate tax savings for current medical expenses but requires planning due to its forfeiture rules. HRAs provide a benefit determined by the employer, a specific amount for healthcare costs without employee contributions.

Purchasing Over-the-Counter Items with Your Benefits

Once eligibility for a tax-advantaged account is established and an eligible over-the-counter item identified, there are practical purchase methods. The two primary methods for using FSA, HSA, or HRA funds are direct payment via a benefits debit card or through a reimbursement process after paying out-of-pocket. Each method requires specific considerations to ensure compliance with plan rules and IRS guidelines. Proper documentation is important for both approaches to verify eligible expenses.

Many FSA and HSA plans provide a dedicated debit card. This card can be used directly at the point of sale for eligible purchases. When used at merchants with an IRS-approved inventory control system (e.g., SIGIS), the system automatically identifies and approves eligible items. This streamlines the process and minimizes manual claim submissions.

If an eligible item is purchased from a merchant without an IRS-approved system, or if the system cannot verify eligibility, the debit card transaction might be declined. In such cases, or if they prefer not to use the debit card, individuals can pay for the OTC item out-of-pocket. Following the purchase, submit a claim to their plan administrator for reimbursement. This requires retaining detailed documentation.

For reimbursement claims, an itemized receipt is required. This receipt must show the date of purchase, the name of the merchant, a description of the item purchased, and the cost. A credit card statement or a receipt that only shows the total amount paid without itemizing the products is insufficient for substantiation. The plan administrator reviews the submitted documentation to confirm the expense is eligible before issuing a reimbursement via direct deposit or check.

Maintaining accurate records of all purchases made with benefits debit cards or submitted for reimbursement is important. While debit card transactions are often automatically substantiated, plan administrators may still request receipts for verification, especially for larger purchases or if there are questions about eligibility. Keeping organized records helps in case of an audit or inquiry from the plan administrator or the IRS. This ensures that all expenditures from tax-advantaged accounts are properly accounted for and meet regulatory requirements.