NEW for 2020: CARES Act repeals “Medicine Cabinet Tax” on OTC reimbursements and expands items eligible for coverage

The Coronavirus Aid, Relief, and Economic Security (CARES) act removes the requirement for a physician’s prescription for many over-the-counter items eligible for Health FSA, HSA, and HRA coverage, while expanding the list of eligible items and providing safe harbor to HDHPs associated with an HSA to cover pre-deductible telehealth and other remote care services. Read, Coronavirus “CARES Act” restores OTC coverage for FSAs, HRAs, HSAs to learn more.

Healthcare expenses that do qualify for reimbursement:

Only expenses not paid or reimbursed by insurance can be qualifying expenses for tax-free reimbursement through a Section 125 cafeteria plan‘s FSA, HSA, or an HRA plan; ref. IRS Publication 502.

• Acupuncture (excluding remedies and treatments prescribed by acupuncturist)
• Alcoholism treatment
• Ambulance
• Artificial limbs/teeth
• Chiropractors
• Christian Science practitioner’s fees
• Contact lenses and solutions
• Co-payments
• Costs for physical or mental illness confinement
• Crutches
• Deductibles
• Dental fees
• Dentures
• Diagnostic fees
• Dietary supplements with doctor’s letter of medical necessity
• Drug and medical supplies (i.e. syringes, needles, etc.)
• Eyeglasses prescribed by your doctor
• Eye examination fees
• Eye surgery (cataracts, LASIK, etc.)
• Hearing devices and batteries
• Hospital bills
• Insulin
• Laboratory fees
• Laser eye surgery
• Obstetrical expenses
• Oral surgery
• Orthodontic fees
• Orthopedic devices
• Oxygen
• Physician fees
• Prescribed medicines
• Psychiatric care
• Psychologist’s fees
• Routine physicals and other non-diagnostic services or treatments
• Smoking-cessation programs
• Smoking-cessation over-the-counter drugs
• Surgical fees
• Vitamins with doctor’s letter of medical necessity
• Weight-loss programs with doctor’s letter of medical necessity
• Weight-loss over-the-counter drugs with doctor’s letter of medical necessity
• Wheelchair
• X-rays

Healthcare reimbursement limitation

The amount of Healthcare reimbursement may not exceed the maximum allowed under the plan. Please review your Summary Plan Description or see your Plan Administrator for more information.

Healthcare expenses that do not qualify for reimbursement:

• Cosmetic surgery and procedures
• Dental bleaching
• Marriage and family counseling
• Over-the-counter items, drugs, or medications that are not medically necessary or are not prescribed by your physician.
• Weight loss programs for general health or appearance
• Premiums you or your spouse pay for insurance coverage (Payroll-deducted premiums sponsored by your employer are eligible under the Premium Only Plan)
• Long-Term Care Insurance does not qualify for reimbursement from a Health FSA. In addition, Long-Term Care Insurance can not be offered through a Cafeteria Plan. (However, Long-Term Care Insurance can be offered through a Section 105 HRA plan.)

Dependent Care

Dependent Care expenses that do qualify for reimbursement:

Qualifying expenses for tax-free reimbursement are those necessary for you and your spouse (if married) to be gainfully employed. For more information, see IRS Publication #503.

• Nanny expenses, for services provided inside your home, are eligible to the extent they are attributable to dependent care expenses and expenses of incidental household services.
• Dependent care expenses incurred for services outside your home, providing they are incurred for the care of a qualifying dependent that regularly spends at least 8 hours per day in your home.
• Registration fees to a daycare facility are eligible as long as the fees are allocable to actual care and not described as materials or other fees.
• Nursery school expenses are eligible, even if the school also furnishes lunch and educational services.
• Food and incidental expenses (diapers, activities, etc.) may be eligible if part of dependent care charge.
• Expenses paid to a relative (e.g. child, parent, or grandparent of participant) are eligible. However, the relative cannot be under age 19 or a tax dependent of the participant.
• FICA and FUTA payroll taxes of the daycare provider are eligible.
• Dependent care expenses incurred to enable the employee to find work are eligible.
• The reimbursement may not exceed the smaller of the following limits:
  – The maximum allowed under the plan.
  – $5,000 (if you are filing a joint tax return) and $2,500 if separate returns are filed.
  – Your taxable compensation (after all compensation reduction elections).
  – If you are married, your spouse’s actual or deemed earned income.

Dependent Care reimbursement limitations

Dependent Care reimbursement may not exceed the smaller of the following limits:

• The maximum allowed under the plan.
• $5,000 (if you are married and filing a joint tax return or are filing as single, head of household) and $2,500 if you are married and separate returns are filed.
• Your taxable compensation (after all compensation reduction elections).
• If you are married, your spouse’s actual or deemed earned income.

Dependent Care expenses that do not qualify for reimbursement:

• Kindergarten fees are almost always an education expense and should never be reimbursed under a dependent care plan.
• Elementary school expenses for a child in first grade or higher are not eligible.
• Food, transportation, and incidental expenses (diapers, activities, etc.) are not eligible if charged separately from dependent care expenses.
• Expenses paid to a housekeeper, maid, cook, etc. are not eligible, except where incidental to child or dependent adult care.
• Mass transit and parking.

Adoption Assistance

Adoption Assistance Program expenses that do qualify for reimbursement:

(For additional information, view IRS Topic No. 607.)

• Credit available for expenses up to $13,810 for each eligible child (2018).
• Credit available for expenses associated with a legal foreign adoption is limited to $13,810 for each eligible child even if the child is “child with special needs.”
• Reasonable and necessary legal adoption fees.
• Court costs.
• Attorney fees.
• Other expenses which are directly related to, and the principal purpose of which is for the legal adoption of an eligible child.

• Qualifying Child:
  – Individual who has not attained the age of 18 as of the time of the adoption.
  – Physically or mentally incapable of caring for himself.

• A Child With Special Needs:
  – Any child who cannot or should not be returned to the home of his or her parents and a specific factor or condition makes it reasonable to conclude that the child cannot be placed with adoptive parents unless assistance is provided as determined by a state.
  – The child must be a citizen or resident of the United States.

• Income Limitations:
  – The credit is phased out ratably for participants with a household modified adjusted gross income over $203,540 and no credit is allowed to participants with a household modified adjusted gross income of $243,540 or more (2017).

Adoption Assistance Program expenses that do not qualify for reimbursement:

• Adoption of a child belonging to the participant’s spouse.
• Illegal adoption fees.
• Surrogate parenting arrangements.
• Legal adoption expenses for which another deduction or credit is allowed.

Health Reimbursement Arrangements (HRAs)

HRA expenses that do qualify for reimbursement:

Only expenses not reimbursed by insurance or any other plan can be  qualifying expenses for tax-free reimbursement.

• Acupuncture (excluding remedies and treatments prescribed by acupuncturist)
• Alcoholism treatment
• Ambulance
• Artificial limbs/teeth
• Chiropractors
• Christian Science practitioner’s fees
• Contact lenses and solutions
• Co-payments
• Costs for physical or mental illness confinement
• Crutches
• Deductibles
• Dental fees
• Dentures
• Diagnostic fees
• Dietary supplements with doctor’s letter of medical necessity
• Drug and medical supplies (i.e. syringes, needles, etc.)
• Eyeglasses prescribed by your doctor
• Eye examination fees
• Eye surgery (cataracts, LASIK, etc.)
• Hearing devices and batteries
• Hospital bills
• Insulin
• Laboratory fees
• Laser eye surgery
• Obstetrical expenses
• Oral surgery
• Orthodontic fees
• Orthopedic devices
• Oxygen
• Physician fees
• Premiums you pay for your health, disability, or long-term care coverages
• Premiums for qualified, employer-sponsored insurance coverages
• Prescribed medicines
• Psychiatric care
• Psychologist’s fees
• Routine physicals and other non-diagnostic services or treatments
• Smoking-cessation programs
• Smoking-cessation over-the-counter drugs
• Surgical fees
• Vitamins with doctor’s letter of medical necessity
• Weight-loss programs with doctor’s letter of medical necessity
• Weight-loss over-the-counter drugs with doctor’s letter of medical necessity
• Wheelchair
• X-rays

HRA reimbursement limitation

The amount of HRA reimbursement may not exceed the maximum allowed under the plan. Please review your Summary Plan Description or see your Plan Administrator for more information.

HRA expenses that do not qualify for reimbursement:

• Cosmetic surgery and procedures
• Dental bleaching
• Marriage and family counseling
• Over-the-counter items, drugs, or medications that are not medically necessary or are not prescribed by your physician.
• Weight loss programs for general health or appearance
• Premiums your spouse pays for their employer-sponsored insurance coverage.