On New Years Day, millions of Americans will awaken to a very unpleasant surprise. Hundreds of medicines and drugs they were able to purchase just the day before on a tax-free basis will no longer be available tax-free.

Why? Because on Jan. 1, 2011, one of health care reform's lesser-known features becomes effective.

Since 2003, participants in tax-free employee benefit plans such as FSAs and HRAs have been able to use those accounts to purchase over-the-counter medicines. This has been a boon for American workers who suffer from common ailments for which over-the-counter remedies are readily available.

Everyday allergy sufferers, for instance, have been able to get through their days sniffle-free without the hassle and expense of going to a doctor, and all completely tax-free.

The OTC allowance has proven so popular, in fact, that industry stakeholders established a nationwide computerized substantiation system for its implementation.

This system enabled cards tied to FSAs and HRAs to immediately reveal whether an over-the-counter item was eligible for tax-free reimbursement.

Plan participants could then purchase the item without having to wait for a reimbursement check. This made for easy, effective - not to mention inexpensive - health care, which is something everyone can endorse.

Nevertheless, health care reform has killed the OTC allowance, along with the substantiation system.

The new law requires that, beginning in 2011, allergy sufferers, not to mention the millions of Americans afflicted with headaches, upset stomachs, heartburn, sore throats, sinus congestion, runny nose and a whole host of other common miseries, will have to get a prescription from a doctor for OTC medicines and drugs if they want to pay for these items on a tax-free basis.

Adding insult to injury, they will also be prohibited from using their benefit cards to make these purchases.

This certainly calls into question the promise that Americans who like their health plans could keep them. Even more curious, however, is just how this requirement is supposed to reduce health care costs, an ostensible goal of health care reform to begin with.

It is generally agreed that unnecessary doctor visits have contributed to rising health care costs in America, yet here we have a provision that requires people with everyday health issues to make periodic visits to the doctor's office - visits that would otherwise be unnecessary by the very definition of over-the-counter medicine.

The IRS itself seems to be a tad perplexed by the new law. An open question since the bill's passage has been what exactly a "medicine or drug" really is. Do medicated bandages count? How about medicated shampoos? The IRS has chosen to punt on this question, informing plan administrators that a "medicine or drug" is something that is "generally classified as a medicine or drug."

While we're at it, what about "prescriptions," which can and do come in many shapes and sizes? Well, according to the IRS, a "prescription" is whatever qualifies as a prescription under state law. Now, suppose you are a benefit plan administrator with employees in multiple states across the nation. How on earth are you going to administer that on a day-to-day basis?

It is tempting to chide the IRS here, but we should resist that temptation, because as an administrative agency the IRS is stuck with whatever Congress dumps in its lap.

What's more, it was the IRS that created the OTC allowance in the first place back in 2003. Yes, you read that correctly: America's tax collection agency created a tax benefit for taxpayers, then Congress - the institution that professes to work for taxpayers - took it away.

Such is the strange state of political affairs in America today.

Other than the creation of a few dollars of revenue for the federal government, it's difficult to see what purpose elimination of the OTC allowance really serves. Truly, you don't have to be a partisan health care reform opponent to see that this new provision is bad law and bad policy, not to mention bad politics.

The next Congress should act quickly to repeal the new provision. Millions of sneezing, coughing, sniffling and otherwise aching taxpayers will appreciate it.


Abramson, JD, SPHR, is general counsel at AmeriFlex.

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