NEW YORK — A provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act, which Congress passed and President Trump signed into law in March, offers a potential boon to consumers and retailers, according to GlaxoSmithKline (GSK), which is one of the largest providers of over-the-counter medications in the world.
The provision in the CARES Act changes the eligibility requirements for reimbursement by flexible spending accounts (FSAs) and health savings accounts (HSAs) to include many O-T-C medications, including feminine care products.
An FSA is a workplace account that can be used to pay for certain out-of-pocket medical costs, such as insurance co-pays, prescriptions, and other health-related items and services. Contributions to an FSA reduce the holder’s taxable income.
An HSA is an account that can be used to pay for a variety of medical costs. However, only those with a qualifying high-deductible health plan are eligible. The contributions to an HSA also reduce taxable income, and the account’s earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses.
Created in the late 1970s, these tax-advantaged accounts can save families a significant amount of money by allowing participants to set aside a portion of their income into a pre-tax account, thus lowering their overall tax liability.
Initially, the Affordable Care Act (ACA), or Obamacare, changed the rules for reimbursing the cost of O-T-Cs through FSAs or HSAs, allowing as of 2011 reimbursement of O-T-C drugs only if they were purchased with a prescription, essentially denying most people the ability to use their FSAs or HSAs when purchasing O-T-Cs. The reason for this, explains Amanda Bowles, director of GSK’s Shopper Science Lab, is that in order to submit for reimbursement under the ACA for an O-T-C product containing a medical ingredient, a consumer would be required to obtain a prescription for that item from a doctor, even though it was O-T-C. This included common O-T-C items, such as pain relievers and cold medications. While this meant that these products were still “eligible,” in practical terms for reimbursement it meant that most people were no longer using their FSA or HSA accounts in purchasing them.
Prior to the rule change in the CARES Act, 52% of households with FSAs had used those funds to purchase O-T-Cs, according to Nielsen.
The change in eligibility, which took effect retroactively to January 1, 2020, is permanent, with no expiration date.
Despite the potential savings to their pocket books, GSK points out that most consumers remain unaware of the changes to the law. Only 29% of shoppers know that they can now use their FSA or HSA benefits on many of their O-T-Cs, and just 12% say they have used their FSA or HSA funds on these products.
Yet, among account holders, there is a strong desire to use these accounts to pay for the O-T-C products that they anticipate buying in the near future, with 65% of account holders saying they are likely to use their FSA or HSA to buy O-T-C products this year, according to data provided by GSK.
“We see a significant role for O-T-C retailers to play in educating their shoppers about the change, as well as helping them take advantage of their benefits,” says Tom Rinck, director of customer and industry development at GSK. “GSK is building a shopper education portal to help people understand the change and what products are newly eligible, as well as how to think ahead to plan their contributions for next year to account for their O-T-C spending. We look forward to partnering with retailers to share this educational platform and to support their in-store and digital activations to bring this closer to shoppers.”
Today, more than 50 million American families rely on FSAs and HSAs to pay for medical and dental expenses that fall outside of traditional health insurance coverage, which is why this particular rule change has the potential to provide significant savings to millions of Americans who currently use these accounts, and to many more who may be eligible but are not currently taking advantage of this benefit.
The average American household spent almost $5,000 per person last year in out-of-pocket health care expenses and insurance premiums, and each year households in the U.S. spend an average of $442 on O-T-C products, which means that the tax savings a household could realize by using pretax dollars for those products could be upwards of $100, depending on income.
It’s worth noting that flex spending accounts have a “use it or lose it” provision, meaning the funds an employee contributes to the account must be used within the calendar year, or be forfeited.
The rule change to include O-T-C medications and feminine care products will provide additional options for Americans to spend their health dollars wisely.
Americans lose as much as $400 million annually in forfeited FSA balances, funds that remain unspent at the end of the benefit period. Now, because of the changes in the CARES Act, those with FSAs or HSAs can receive tax-free distributions from their accounts to pay for, or be reimbursed for, qualified medical expenses that they incur after establishing the account. The definition of a qualified medical expense is set by the IRS and is the same for FSAs and HSAs.
According to the IRS, qualified medical expenses include the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses also include payments for legal medical services rendered by physicians, surgeons, dentists and other medical practitioners and include the costs of equipment, supplies and diagnostic devices needed for these purposes.
Medical care expenses must be primarily used to alleviate or prevent a physical or mental disability or illness. They don’t, however, include expenses that are merely beneficial to general health, such as vitamins. Dual-purpose products, which have both a medical and personal hygiene, cosmetic or general health purpose, are also not eligible.
In terms of benefits to retailers, the O-T-C eligibility change came at a time of turmoil in this country created by the pandemic, says Rinck, who adds that retailers now have an opportunity to connect with their shoppers to educate them on the change and to help them understand which products qualify, and how to use their accounts when purchasing these now eligible items.
The change in eligibility requirements also benefits consumer packaged goods companies, Rinck believes, by making products more accessible to more people and allows people to have more control over their health care spending. For instance, using pretax money might mean that shoppers can afford to stock up on the products they want to have on hand going into the cold and flu season, or to plan ahead for their digestive health or pain management needs. “This puts the consumer in better control of their health,” says Rinck, “which is a great benefit of O-T-Cs.”
And, in Rinck’s view, the change gives a boost to the U.S. health care system overall because, by expanding the affordability of and access to O-T-C medications, it provides safe and effective treatment and relief to many common conditions.
The Consumer Healthcare Products Association, for instance, has found that every dollar spent on O-T-C medicines saves more than $7 for the U.S. health care system.
Consumers with FSAs or HSAs should check with their benefits provider, Rinck suggests, to inquire how this change could potential benefit them. One of the easiest ways, he points out, is for consumers to simply pay for these O-T-C items with their FSA or HSA debit card when at checkout. If shoppers don’t have a debit card or the card is not accepted where they shop, they can keep their receipts to submit for reimbursement.
And, as the change is retroactive, consumers can submit those receipts for purchases dating back to January 1.