OTC Medication Eligibility for HSAs and FSAs: Rules and Penalties

Over-the-counter medication eligibility for HSAs and FSAs is broad: since the CARES Act, almost any OTC medicine or health product sold without a prescription counts as a qualified medical expense, along with menstrual care products, first aid supplies, and sunscreen with SPF 15 or higher. Personal care items, general-purpose vitamins, and cosmetic products still don’t qualify. The details below will keep you from a denied claim or a surprise tax bill.

The Prescription Rule Is Gone

Before 2020, you needed a doctor’s prescription to use HSA or FSA dollars on almost any OTC drug. Insulin was the only exception. The CARES Act amended the Internal Revenue Code to let OTC medicines and drugs count as qualified medical expenses for HSAs, FSAs, HRAs, and Archer MSAs without a prescription, effective for anything purchased after December 31, 2019. The change is permanent.¹

The underlying test is the same one the IRS has always used: an expense qualifies if it diagnoses, cures, treats, or prevents disease, or affects the structure or function of the body. Ibuprofen for a headache clearly fits. The CARES Act simply removed the extra prescription hurdle for products that already met that definition. IRS Publication 969 now states plainly that OTC medicine, whether or not prescribed, and menstrual care products count as covered expenses.²

What Qualifies

If a product treats, prevents, or diagnoses a medical condition and it’s sold without a prescription, it almost certainly qualifies. The categories below cover most of what people buy.

Medications

Pain relievers: acetaminophen, ibuprofen, naproxen, and aspirin.
Allergy and sinus treatments: antihistamines, nasal sprays, and decongestants.
Cold and flu remedies: cough suppressants, expectorants, and medicated throat lozenges.
Digestive treatments: antacids, anti-diarrheal medications, and laxatives.
Topical treatments: anti-itch creams, antibiotic ointments, and antifungal products.

First Aid Supplies and Diagnostic Tools

Eligibility reaches well past the medicine aisle. Bandages, gauze, first aid kits, and elastic wraps qualify. So do thermometers (digital, ear, or forehead), blood pressure monitors, and glucose monitoring supplies. Home test kits for conditions such as COVID-19, cholesterol, and blood sugar are covered as well.

Menstrual Care Products

The CARES Act specifically added menstrual care products to the list. Tampons, pads, liners, menstrual cups, and similar products all qualify.¹ Congress wrote them into the statute by name, so no letter from a doctor is needed.

Breast Pumps and Lactation Supplies

Manual and electric breast pumps, storage bags, and nursing pads are all eligible. The IRS draws the line at extra bottles used for general food storage rather than lactation.³

Sunscreen

Sunscreen with an SPF of 15 or higher qualifies. Anything below SPF 15, and suntan lotion, does not, because the FDA classifies them differently. Check the SPF number on the label before you swipe your card.⁴

What Doesn’t Qualify

Personal-use items don’t count as medical expenses, even if they contribute to your general well-being. IRS Publication 502 identifies toothbrushes and toothpaste specifically as nondeductible personal expenses. The same logic covers shaving cream, standard soaps, and basic cosmetics.³

Vitamins, herbal supplements, and nutritional products taken to maintain general health are also ineligible. The IRS says you cannot include the cost of these items unless a medical practitioner recommends them as treatment for a specific condition diagnosed by a physician.³ A daily multivitamin you take “just in case” doesn’t pass this test. Prenatal vitamins are the notable exception, because they serve the specific medical purpose of preventing birth defects, and they qualify without a separate prescription.

Cosmetic products and procedures fall outside the definition of medical care unless they treat a disfigurement from disease, injury, or a congenital abnormality. If a product’s main purpose is appearance rather than treatment, it won’t qualify.

Dual-Purpose Items and the Letter of Medical Necessity

Some products sit between the two lists: they could be for general well-being or for a diagnosed condition. Vitamins for a specific deficiency, supplements recommended to treat a condition, and equipment with both medical and personal uses all fall in this category. For these dual-purpose items, your FSA or HSA administrator will require a Letter of Medical Necessity from your doctor.

The letter has to identify the medical condition being treated, explain how the product helps, and state how long the treatment should last. Your provider signs it, and you keep a copy with your records.⁵ Without the letter, a claim for a dual-purpose item will be denied. Get the letter before you buy so you don’t pay out of pocket and then chase a reimbursement.

How to Pay and What to Keep

The simplest option is swiping your HSA or FSA debit card at checkout. Many large retailers use the Inventory Information Approval System, which checks each item’s barcode against an eligibility database as the transaction runs. Eligible items go through automatically; ineligible items are declined.⁶ Not every store participates, so a declined card doesn’t always mean the product is ineligible.

If you pay out of pocket, submit a reimbursement claim through your plan administrator. Federal employee claims through FSAFEDS are typically handled within one to two business days after they’re received and verified.⁷ Private-sector timing varies.

Either way, save itemized receipts. A credit card statement isn’t enough. Your receipt has to show the specific item, the date, the merchant, and the amount paid, because the IRS can ask you to prove the purchase qualified.⁸ Scan or photograph receipts the day you buy; thermal paper fades. If a purchase needed a Letter of Medical Necessity, file the letter with the receipt.

The Penalty If You Get It Wrong

Using an HSA for something that isn’t a qualified medical expense triggers two hits. The withdrawal is added to your taxable income for the year, and the IRS applies an additional 20% tax on top. On a $500 ineligible purchase, that’s income tax on the $500 plus a $100 penalty. The 20% additional tax disappears once you reach Medicare eligibility age (currently 65), become disabled, or die; qualified medical withdrawals stay tax-free at any age.⁹

FSA penalties work differently, because the money was excluded from your paycheck before taxes in the first place. If your administrator finds a purchase ineligible, you’ll be asked to repay the amount or substitute documentation for a different eligible expense. Federal employees can appeal a denied claim through a process that ends, if needed, with an independent third-party arbitrator.¹⁰

1
EveryCRSReport.com. Selected Health Provisions in Title III of the CARES Act (P.L. 116-136)
2
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. Publication 502, Medical and Dental Expenses
4
FSAFEDS. Eligible Health Care FSA (HC FSA) Expenses
5
FSAFEDS. FSAFEDS Letter of Medical Necessity Form
6
SIGIS. Merchants – IIAS Merchant Certification
7
FSAFEDS. How Long Will It Take to Receive Reimbursement
8
FSAFEDS. Eligible Health Care FSA (HC FSA) Expenses
9
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
10
FSAFEDS. How Do I Appeal a Claim That Has Been Denied