House Ways & Means Committee Issued Report Restoring Access to Medication Act

Targeted News Service

WASHINGTON, Oct. 28 -- The House Ways and Means Committee issued a report (H. Rpt. 114-308) on legislation (H.R. 1270) to amend the Internal Revenue Code of 1986 to repeal the amendments made by the Patient Protection and Affordable Care Act that disqualify expenses for over-the-counter drugs under health savings accounts and health flexible spending arrangements. The report was advanced by Rep. Paul Ryan, R-Wis., on Oct. 23, 2015.

Excerpts follow:

A. PURPOSE AND SUMMARY

The bill, H.R. 1270, as reported by the Committee on Ways and Means, repeals the prohibition on using tax-free funds from HSAs, Archer MSAs, health FSAs, and HRAs to purchase over-the-counter medication.

B. BACKGROUND AND NEED FOR LEGISLATION

While the Committee continues to actively pursue health care reform to relieve unnecessary burdens on the broader economy and on taxpayers in need of access to quality health care, the Committee also believes it is important to provide immediate relief from taxes imposing excessive constraints on individual choice. The Committee believes that eliminating the prohibition on using tax-free funds from HSAs, Archer MSAs, health FSAs, and HRAs to purchase over-the-counter medication will relieve an unfair tax burden.

C. LEGISLATIVE HISTORY

Background

H.R. 1270 was introduced on March 4, 2015, and was referred to the Committee on Ways and Means.

Committee action

The Committee on Ways and Means marked up H.R. 1270, the `Restoring Access to Medication Act of 2015' on September 17, 2015, and ordered the bill, as amended, favorably reported (with a quorum being present).

Committee hearings

The harmful effects of the prohibition on using tax-favored funds from various health-related savings and reimbursement vehicles to purchase over-the-counter medication was discussed at one hearing during the 114th Congress:

Full Committee Hearing on Obamacare Implementation and the Department of Health and Human Services FY 16 Budget Request (June 10, 2015).

II. EXPLANATION OF THE BILL

A. REPEAL OF THE DISQUALIFICATION OF EXPENSES FOR OVER-THE-COUNTER DRUGS UNDER CERTAIN ACCOUNTS AND ARRANGEMENTS (SEC. 2 OF THE BILL AND SECS. 106, 220, 223 OF THE CODE)

PRESENT LAW

Individual deduction for medical expenses

Expenses for medical care, not compensated for by insurance or otherwise, are deductible by an individual under the rules relating to itemized deductions to the extent the expenses exceed 10 percent of adjusted gross income (`AGI') in a given year. 1 [Footnote]

[Footnote 1: Sec. 213(a). The threshold is 7.5 percent for taxable years beginning before January 1, 2017, with respect to a taxpayer if the taxpayer or the taxpayer's spouse has attained age 65 before the close of the taxable year. Except where otherwise stated, all references are to the Internal Revenue Code of 1986, as amended.]

Medical care generally is defined broadly as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure of the body. 2 [Footnote]

[Footnote 2: Sec. 213(d). There are certain limitations on the general definition including a rule that cosmetic surgery or similar procedures are generally not medical care.]

Under an explicit limitation, any amount paid during a taxable year for medicine or drugs is deductible as a medical expense only if the medicine or drug is a prescribed drug or insulin. 3 [Footnote]

[Footnote 3: Sec. 213(b).]

Prescribed drug for this purpose means a drug or biological which requires a prescription of a physician for its use by an individual. 4 [Footnote]

[Footnote 4: Sec. 213(d)(3).]

Thus, any amount paid for medicine available without a prescription (`over-the-counter medicine') is not deductible as a medical expense, including any medicine prescribed or recommended by a physician. 5 [Footnote]

[Footnote 5: Rev. Rul. 2003-58, 2003-1 C.B. 959.]

Exclusion for employer-provided health benefits

Employees are not taxed on (that is, may exclude from gross income and from wages for payroll tax purposes) the value of employer-provided health coverage under an accident or health plan. 6 [Footnote]

[Footnote 6: Secs. 106 and 3121(a)(2).]

In addition, any reimbursements under an employer-provided accident or health plan for medical care expenses for employees, their spouses, their dependents, and adult children under age 27 generally are excludible from gross income (and from wages for payroll tax purposes). 7 [Footnote]

[Footnote 7: Sec. 105(b).]

An employer may agree to reimburse expenses for medical care of its employees (and their spouses, dependents, and adult children under age 27), not covered by a health insurance plan, through a flexible spending arrangement (`FSA') which allows reimbursement not in excess of a specified dollar amount, provided the amount is only available for reimbursement for medical care. 8 [Footnote]

[Footnote 8: Treas. Reg. sec. 1.105-2.]

The amount available for reimbursement is either elected by an employee under a cafeteria plan (`health FSA') or otherwise specified by the employer under a health reimbursement arrangement (`HRA'). Reimbursements under these arrangements are also excludible from gross income (and from wages for payroll tax purposes) as reimbursements for medical care under employer-provided health coverage.

Health savings accounts

An individual with a high deductible health plan (and no other health plan other than a plan that provides certain permitted insurance or permitted coverage) may establish a health savings account (`HSA'). 9 [Footnote]

[Footnote 9: Sec. 223.]

In general, HSAs provide tax-favored treatment for current medical expenses as well as the ability to save on a tax-favored basis for future medical expenses. In general, HSAs are tax-exempt trusts or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder and his or her spouse and dependents. Thus, earnings on amounts in HSAs are not taxable.

Subject to limits, 10 [Footnote]

[Footnote 10: For 2015, the maximum aggregate annual contribution that can be made to an HSA is $3,350 in the case of self-only coverage and $6,650 in the case of family coverage. The annual contribution limits are increased by $1,000 for individuals who have attained age 55 by the end of the taxable year (referred to as `catch-up contributions'). Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.]

contributions made to an HSA by an employer, including contributions made through a cafeteria plan through salary reduction, are excludible from income (and from wages for payroll tax purposes). Contributions made by individuals are deductible for income tax purposes, regardless of whether the individuals itemize deductions. Distributions from an HSA that are used for qualified medical expenses are excludible from gross income. Distributions from an HSA that are not used for qualified medical expenses are includible in gross income and are subject to an additional tax of 20 percent. The 20-percent additional tax does not apply if the distribution is made after death, disability, or the individual attains the age of Medicare eligibility (i.e., age 65). Similar rules apply for another type of medical savings arrangement called an Archer medical savings account (`Archer MSA'). 11[Footnote]

[Footnote 11: Sec. 220.]

Medical care for excludible reimbursements

For purposes of the exclusion for reimbursements under employer-provided accident and health plans (including under health FSAs and HRAs), and for distributions from HSAs and Archer MSAs used for qualified medical expenses, the definition of medical care is generally the same as the definition that applies for the itemized deduction for the cost of medical care. However, prior to the enactment of the Patient Protection and Affordable Care Act (referred to as the `Affordable Care Act'), 12 [Footnote]

[Footnote 12: The Patient Protection and Affordable Care Act, Pub. L. No 111-148, enacted March 23, 2010, and the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, enacted March 30, 2010, are collectively referred to as the Affordable Care Act..]

the limitation (applicable to the itemized deduction) that only prescription medicines or drugs and insulin are taken into account did not apply. Thus, for example, amounts paid from a health FSA or HRA, or funds distributed from an HSA to reimburse a taxpayer for over-the-counter medicine, such as nonprescription aspirin, allergy medicine, antacids, or pain relievers, were excludible from income even though, if the taxpayer paid for such amounts directly (without such reimbursement), the expenses could not be taken into account in determining the itemized deduction for medical expenses. 13 [Footnote]

[Footnote 13: Rev. Rul. 2003-102, 2993-2 C.B. 559, obsoleted by Rev. Rul. 2010-23, 2010-39 I.R.B. 388.]

For years beginning after December 31, 2010, the Affordable Care Act changed the definition of medical care for purposes of the exclusion for reimbursements for medical care under employer-provided accident and health plans and for distributions from HSAs and Archer MSAs used for qualified medical expenses to require that over-the-counter medicine (other than insulin) be prescribed by a physician in order for the medicine to be medical care for these purposes. 14 [Footnote]

[Footnote 14: Sec. 9003 of the Affordable Care Act. Notice 2010-59, 2010-39 I.R.B. 388, provides guidance on this change to the definition of medical care for these purposes.]

Thus, under present law, preferential treatment under a health FSA or an HRA is available only on reimbursements for the cost of over-the-counter medicine if the medicine is prescribed by a physician, and distributions from an HSA or an Archer MSA used to purchase over-the-counter medicine are not a qualified medical expense unless the medicine is prescribed by a physician. 15 [Footnote]

[Footnote 15: This rule still differs from the rule in section 213(a) and (d)(3) disallowing the medical expense deduction for over-the-counter medicine. Under the section 213 rule, the expense for any medicine available without a prescription (other than insulin) is not deductible even if the particular individual has a prescription.]

REASON FOR CHANGE

The Committee observes that the requirement that over-the-counter medicine requires a prescription in order to be an eligible expense for individuals and families covered by a health FSA, HSA, HRA, or Archer MSA has left these consumers with three options: (1) seek an unnecessary appointment with a doctor to obtain a prescription, and then submit the purchase for reimbursement under a health FSA account; (2) purchase the over-the-counter medicine out-of-pocket, which significantly increases the after-tax cost to the consumer; or (3) forego treatment entirely and suffer from the symptoms of the condition. The Committee notes that all three options increase costs to the consumer and to our healthcare system. The Committee therefore believes that the provision of the Affordable Care Act that disqualified expenses for over-the-counter medicine (unless obtained with a prescription) from being medical expenses under health FSAs, HRAs, HSAs, and Archer HSAs should be repealed.

EXPLANATION OF PROVISION

The provision repeals the change to the definition of medical care made by the Affordable Care Act for purposes of the exclusion for reimbursements for medical care under employer-provided accident and health plans and for distributions from HSAs or Archer MSAs used for qualified medical expenses that requires that over-the-counter medicine (other than insulin) be prescribed by a physician in order for the medicine to qualify for tax-favored treatment under these health-related savings and reimbursement vehicles. Thus, for example, amounts paid from a health FSA or HRA, or funds distributed from an HSA or an Archer MSA, to reimburse a taxpayer for over-the-counter medicine, such as nonprescription aspirin, allergy medicine, antacids, or pain relievers, will be tax-free in accordance with the general rules associated with those health-related savings and reimbursement vehicles.

EFFECTIVE DATE

The provision is effective with respect to expenses incurred after December 31, 2015.

III. VOTES OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of the House of Representatives, the following statement is made concerning the vote of the Committee on Ways and Means in its consideration of H.R. 1270, the `Restoring Access to Medication Act of 2015,' on September 17, 2015.

The Chairman's amendment in the nature of a substitute was adopted by a voice vote (with a quorum being present).

The bill, H.R. 1270, was ordered favorably reported as amended to the House of Representatives by a voice vote (with a quorum being present).

IV. BUDGET EFFECTS OF THE BILL

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d) of rule XIII of the Rules of the House of Representatives, the following statement is made concerning the effects on the budget of the bill, H.R. 1270, as reported.

The bill, as reported, is estimated to have the following effect on Federal budget receipts for fiscal years 2016-2025: [1]

Click here to view table (http://thomas.loc.gov/cgi-bin/cpquery/14?&sid=cp114SaYVO&refer=&r_n=hr308.114&db_id=114&item=14&&sid=cp114SaYVO&r_n=hr308.114&hd_count=50&item=14&&sel=TOC_17604&)

Pursuant to clause 8 of rule XIII of the Rules of the House of Representatives, the following statement is made by the Joint Committee on Taxation with respect to the provisions of the bill amending the Internal Revenue Code of 1986: the gross budgetary effect (before incorporating macroeconomic effects) in any fiscal year is less than 0.25 percent of the current projected gross domestic product of the United States for that fiscal year; therefore, the bill is not `major legislation' for purposes of requiring that the estimate include the budgetary effects of changes in economic output, employment, capital stock and other macroeconomic variables.

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue-reducing tax provisions involve increased tax expenditures. (See amounts in table in Part IV.A., above.)

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, requiring a cost estimate prepared by the CBO, the following statement by CBO is provided.

U.S. Congress,

Congressional Budget Office,

Washington, DC, September 22, 2015.

Hon. PAUL RYAN

Chairman, Committee on Ways and Means,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1270, the Restoring Access to Medication Act of 2015.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Peter Huether.

Sincerely,

KEITH HALL.

Enclosure.

H.R. 1270--Restoring Access to Medication Act of 2015

Summary: H.R. 1270 would amend the Internal Revenue Code to repeal the provisions that disqualify expenses for over-the-counter medicine under health savings accounts (HSAs), Archer medical savings accounts (Archer MSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs). The staff of the Joint Committee on Taxation (JCT) estimates that enacting H.R. 1270 would reduce revenues by about $6.6 billion over the 2016-2025 period. Of that reduction, about $1.2 billion would result from changes in off-budget revenues (from Social Security payroll taxes, which are categorized as off-budget). Pay-as-you-go procedures apply because enacting the legislation would affect on-budget revenues.

JCT has determined that the bill contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA).

Estimated cost to the Federal Government: The estimated budgetary impact of H.R. 1270 is shown in the following table.

Click here to view table (http://thomas.loc.gov/cgi-bin/cpquery/14?&sid=cp114SaYVO&refer=&r_n=hr308.114&db_id=114&item=14&&sid=cp114SaYVO&r_n=hr308.114&hd_count=50&item=14&&sel=TOC_19673&)

Basis of Estimate: The bill would allow taxpayers to be reimbursed for purchases of over-the-counter medications from their HSAs, Archer MSAs, FSAs, and HRAs. Under current law, expenses for over-the-counter medications are not eligible for reimbursement from those accounts unless the medicine is prescribed by a physician. The bill would expand the expenses eligible for reimbursement under these health accounts, which provide tax-favored treatment for medical expenses. The bill would be effective for expenses incurred after December 31, 2015. JCT estimates that enacting H.R. 1270 would reduce on-budget revenues by about $5.4 billion and off-budget revenues by about $1.2 billion from 2016 through 2025, thereby increasing federal deficits by about $6.6 billion over that period.

Pay-As-You-Go Considerations: The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct spending or revenues. The net changes in revenues that are subject to those pay-as-you-go procedures are shown in the following table. Only on-budget changes to outlays or revenues are subject to pay-as-you-go procedures.

Click here to view table (http://thomas.loc.gov/cgi-bin/cpquery/14?&sid=cp114SaYVO&refer=&r_n=hr308.114&db_id=114&item=14&&sid=cp114SaYVO&r_n=hr308.114&hd_count=50&item=14&&sel=TOC_19673&)

Intergovernmental and private-sector impact: JCT has determined that the bill contains no intergovernmental or private-sector mandates as defined in UMRA.

Estimate prepared by: Peter Huether.

Estimate approved by: David Weiner, Assistant Director for Tax Analysis.

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives (relating to oversight findings), the Committee advises that it was as a result of the Committee's review of the provisions of H.R. 1270 that the Committee concluded that it is appropriate to report the bill, as amended, favorably to the House of Representatives with the recommendation that the bill do pass.

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required.

C. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-4).

The Committee has determined that the bill does not contain Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental mandate on State, local, or tribal governments.

D. APPLICABILITY OF HOUSE RULE XXI 5(B)

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that `A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not be considered as passed or agreed to unless so determined by a vote of not less than three-fifths of the Members voting, a quorum being present.' The Committee has carefully reviewed the bill, and states that the bill does not involve any Federal income tax rate increases within the meaning of the rule.

E. TAX COMPLEXITY ANALYSIS

The following statement is made pursuant to clause 3(h)(1) of rule XIII of the Rules of the House of Representatives. Section 4022(b) of the Internal Revenue Service Restructuring and Reform Act of 1998 requires the staff of the Joint Committee on Taxation (in consultation with the Internal Revenue Service and the Treasury Department) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. For each such provision identified by the staff of the Joint Committee on Taxation a summary description of the provision is provided along with an estimate of the number and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues.

1. Modifications to definition of medical care with respect to over-the-counter-medicine

Summary description of the provisions

The provision changes the definition of medical care for purposes of the exclusion for reimbursements for medical care under employer-provided accident and health plans (which include health FSAs and HRAs) and for distributions from HSAs or Archer MSAs used for qualified medical expenses to include over-the-counter medicine not prescribed by a physician.

Number of affected taxpayers

It is estimated that the provision will affect over ten percent of individual tax returns.

Discussion

Taxpayers voluntarily claiming reimbursement for over-the-counter medicines may have an increased burden in record keeping and claim submissions.

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F. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND LIMITED TARIFF BENEFITS

With respect to clause 9 of rule XXI of the Rules of the House of Representatives, the Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not contain any congressional earmarks, limited tax benefits, or limited tariff benefits within the meaning of the rule.

G. DUPLICATION OF FEDERAL PROGRAMS

In compliance with Sec. 3(g)(2) of H. Res. 5 (114th Congress), the Committee states that no provision of the bill establishes or reauthorizes: (1) a program of the Federal Government known to be duplicative of another Federal program, (2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111-139, or (3) a program related to a program identified in the most recent Catalog of Federal Domestic Assistance, published pursuant to the Federal Program Information Act (Public Law 95-220, as amended by Public Law 98-169).

H. DISCLOSURE OF DIRECTED RULE MAKINGS

In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), the following statement is made concerning directed rule makings: The Committee estimates that the bill requires no directed rule makings within the meaning of such section.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

A. TEXT OF EXISTING LAW AMENDED OR REPEALED BY THE BILL, AS REPORTED

In compliance with clause 3(e)(1)(A) of rule XIII of the Rules of the House of Representatives, the text of each section proposed to be amended or repealed by the bill, as reported, is shown below:

TEXT OF EXISTING LAW AMENDED OR REPEALED BY THE BILL, AS REPORTED

In compliance with clause 3(e)(1)(A) of rule XIII of the Rules of the House of Representatives, the text of each section proposed to be amended or repealed by the bill, as reported, is shown below:

INTERNAL REVENUE CODE OF 1986

The full text of the report is found at: http://thomas.loc.gov/cgi-bin/cpquery/14?cp114:temp/~cp114SaYVO&sid=cp114SaYVO&item=14&sel=TOCLIST&l_f=301&l_file=list/cp114ch.lst&l_b=251&l_file=list/cp114ch.lst&report=hr308.114&hd_count=50&44&&&l_t=358&&&

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; [email protected]; http://www.targetednews.com

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