BERKELEY HEIGHTS, N.J. (TheStreet) -- Flexible Savings Arrangements were modified starting Jan. 1, a result of the health care legislation enacted a year ago, with over-the-counter medicines no longer qualifying for reimbursement unless you have a prescription. The only exception to the rule is insulin.
The new rule affects only purchases made after Jan. 1, though, so over-the-counter purchases made last year could still be reimbursed if allowed by an employer's FSA plan. (It should be noted this same rule also applies to Medical Savings Accounts, Health Savings Accounts and Health Reimbursement Arrangements.)
On the upside, effective March 30 the FSA rules allow for someone under the age of 27 to qualify for expense reimbursement.
Do FSA plans still make sense, given the new rules? The answer is absolutely yes.
FSAs allow employees to set aside pretax dollars to pay for unreimbursed medical expenses. These plans typically have a maximum annual dollar contribution amount. FSAs are great for employees because they reduce their taxable income and are not subject to employment taxes. The accounts also provide a funding vehicle for unreimbursed medical expenses.
Reimbursable expenses still allowed from FSAs include items such as eyeglasses, dental work, contact lenses, co-pays and deductibles, so the loss of over-the-counter medications from the list is not so important. A person without an FSA normally would have to claim these expenses as an itemized medical deduction subject to 7.5% of their adjusted gross income. People are far better off getting their income reduced dollar for dollar rather than making an itemized deduction subject to a threshold.
With an FSA plan the most important factor is how much to contribute each year. People who contribute too much forfeit their unused balance, so someone using an FSA needs to figure out how much in qualifying medical expenses they will likely have in any given year. (Now, of course, when making contributions since 2010 they need to remove over-the-counter medications from their estimates.)