Here’s good news. The CARES Act reinstated the ability of health reimbursement arrangements (HRAs) to reimburse and deduct the cost of over-the-counter drugs and added a new deduction for menstrual care products.
The changes apply retroactively (yes, retroactively) to amounts paid after December 31, 2019.
As you likely know, individual taxpayers who itemize their medical tax deductions may not deduct over- the-counter products. Such taxpayers may deduct prescribed drugs only.1
But thanks to CARES Act Section 3702,2 beginning in 2020 and later, HRAs, flexible spending accounts (FSAs), health savings accounts, and Archer medical savings accounts (MSAs) can reimburse over- the-counter drugs and medicines used to treat illness or injury, as well as menstrual care products.
IRS Approves Retroactive Reimbursement
IRS Notice 2021-15 states that you can amend your existing plans to provide for reimbursements of expenses for menstrual care products and over-the-counter drugs without prescriptions incurred for any period beginning on or after January 1, 2020.3
And the IRS says that you can do this even though there may be inconsistencies between the IRS notice and the tax code and IRS regulations.4
Updated Sample Plans
For users of the 105-HRA plan agreement that we discussed in Blueprint for Employee-Spouse 105-
HRA (Health Reimbursement Arrangement), here are links to the following sample documents updated for the January 1, 2020, effective date:
- 105-HRA sample plan document
- 105-HRA employee reimbursement request
For users of the QSEHRA agreement that we discussed in Announcing NEW Tax-Deductible Penalty- Free Health Plans for Small Businesses, here are the sample plan documents and reimbursement requests updated for the newly allowed reimbursements:
- QSEHRA sample plan document
- QSEHRA employee reimbursement request
Retroactive to January 1, 2020, your Section 105-HRA, QSEHRA, ICHRA, Archer MSA, and FSA may reimburse over-the-counter drugs and menstrual products. For this benefit, thank the CARES Act and IRS Notice 2021-15.
Only the HRA and the other business plans listed above can deduct (via reimbursement to employees) the over-the-counter drugs and menstrual products. Individuals need prescriptions to activate such possible tax deductions.
As to the retroactive component, the fact that the plan did not cover the expense at the time the expense was incurred is not relevant, according to Notice 2021-15. Thus, you may want to reimburse your employees for 2020 or 2021 drugs and products and amend your tax returns for the new expend.