The Benefits of HSAs, FSAs, and HRAs: Using Pre-Tax Dollars for OTC Medications & Menstrual Care

Since healthcare costs are skyrocketing, every little bit saved can go a long way in easing the financial burden. One lesser-known but potentially high impact COVID-19 relief measure within the Coronavirus Aid, Relief, and Economic Security (CARES) Act is that Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and Health Reimbursement Arrangements (HRAs) can once again be used to pay for over-the-counter (OTC) medications.

This change, which rolled back a rule in place since 2011, allows taxpayers with these accounts to leverage pre-tax dollars on a range of common OTC medicines—a significant cost-saving opportunity for millions of Americans. Furthermore, as part of the CARES Act legislation, menstrual care products are now categorized as qualified medical expenses, unlocking further savings potential for those with an HSA, FSA, or HRA.

Let’s delve deeper into these financial tools and explore how they can help you save money on necessary healthcare expenses.

What are Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs)?

Before diving into the benefits of using these accounts for OTC medications and menstrual care products, let’s first understand their nature and purpose.

1. Health Savings Accounts (HSAs)

An HSA is a tax-exempt savings account that can be paired with a high-deductible health plan (HDHP). Funded through payroll deductions or individual contributions, the money in your HSA can be used to cover eligible medical expenses without being subject to federal income taxes.

You may contribute up to the annual limit set by the IRS ($3,650 for individuals and $7,300 for families in 2021). You’re also entitled to a catch-up contribution if you are 55 or older.

HSAs offer triple tax savings:

1. Contributions are pre-tax (if made through payroll deductions).
2. The money grows tax-free.
3. Distributions for qualified medical expenses are tax-free.

Unused funds in your HSA can be carried over to future years, and the account belongs to you—not your employer.

2. Flexible Spending Accounts (FSAs)

An FSA is an employer-sponsored benefit plan that allows employees to set aside pre-tax income for qualified medical expenses. Unlike HSAs, FSA funds are “use it or lose it” each year—meaning if you don’t use the allocated amount by the end of the plan year, you may forfeit it.

In 2021, employees can contribute up to $2,750 in pre-tax income to an FSA.

3. Health Reimbursement Arrangements (HRAs)

HRAs are employer-funded plans that reimburse employees for qualified medical expenses on a tax-free basis. Unlike HSAs and FSAs, HRAs are typically funded by the employer and do not require employee contributions. Employers can establish their own rules regarding eligibility, benefits, and plan year.

OTC Medications Eligible under CARES Act

In a move aimed at easing the financial burden on individuals and families, the CARES Act has once again allowed HSAs, FSAs, and HRAs to be used for purchasing OTC medications. This reverses an IRS rule introduced in 2011 that classified these items as non-qualified expenses, pushing consumers to use after-tax dollars.

The CARES Act allows the reimbursement of a broad range of OTC medicines, including:

• Pain relievers (e.g., aspirin, ibuprofen)
• Antacids
• Allergy medications
• Cold and flu remedies
• Diarrhea treatments
• Heartburn drugs
• Laxatives
• Stomachache medicine

To ensure your expenses are eligible for reimbursement through these accounts, purchase these items separately from other non-qualified items. Keep the receipt as proof of purchase and follow your account provider’s guidelines to seek reimbursement.

Menstrual Care Products Eligible as Qualified Medical Expenses

In addition to OTC medications, menstrual care products are now categorized as qualified medical expenses under the CARES Act legislation. This change allows individuals with HSAs, FSAs, and HRAs to use their pre-tax dollars to cover the cost of:

• Tampons
• Pads
• Menstrual sponges
• Menstrual cups
• Menstrual discs

While this new ruling is not applicable to taxable income (you cannot claim a tax deduction for menstrual care product expenses), it offers significant cost savings for those with HSAs, FSAs, or HRAs.

Important PSA: Temporary Adjustments in Merchant Point-of-Sale Systems

It’s crucial to note that merchants must update their point-of-sale (POS) systems to recognize OTC medications and menstrual care products as qualified medical expenses. As of this writing, you may need to pay out-of-pocket for these items and keep the receipt to expense or claim the purchases with your HSA, FSA, or HRA provider and have them reimburse you.

For future transactions, combine OTC medications and menstrual care products into a separate checkout transaction from unqualified non-medical expenses, so that you have a separate receipt in case the debit card transaction does not go through and you have to use a regular credit card and expense and get reimbursed later.

The CARES Act has introduced valuable opportunities for individuals with HSAs, FSAs, or HRAs to save on medical expenses by allowing the reimbursement of OTC medications and menstrual care products. By taking advantage of these changes and following the necessary steps to claim eligible expenses, you can maximize your savings and alleviate financial pressure in an uncertain economic climate.

For additional information, consult your employer’s HR department or your HSA/FSA administrator for specific guidance on utilizing these accounts.