IRS Issues Rule Change on Using Debit Cards for OTC Drugs

Effective January 1, 2011, the Affordable Care Act requires that individuals obtain a prescription for over-the-counter (OTC) medicines and drugs (other than insulin) in order to receive reimbursement for the cost of the medicine from a health plan. The Internal Revenue Service (IRS) issued Notice 2010-59 in November 2010, which prohibited plans from allowing a health Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) debit card to pay for OTC medicines and drugs, even if the individual has obtained a prescription for the drug. The IRS allowed for a two-week transition period (from January 1-15, 2011) during which debit cards could be used to purchase OTC drugs, in order to allow debit-card systems to be re-programmed.

On December 23, 2010, the IRS issued Notice 2011-5 and accompanying answers to frequently asked questions (FAQs), which reversed its position on the use of debit cards to purchase OTC medicines and drugs for which the individual has a prescription. Effective  January 16, 2011, under certain conditions, health FSA and HRA debit cards may continue to be used to purchase OTC medicines or drugs at the following businesses: pharmacies, drug stores and grocery stores if those stores have pharmacies, and mail-order and Web-based vendors that sell prescription drugs.

Conditions for Using Debit Cards to Purchase OTC Medicines or Drugs

  • The prescription must be presented to the pharmacist at or before the time of purchase,
  • The OTC medicine or drug must be dispensed by a pharmacist under applicable law;
  • A prescription number must be assigned;
  • The pharmacy or other entity must retain records of the prescription number, purchaser, amount, and date of sale;
  • The pharmacy or other entity must make these records available to the employer on request;
  • The debit card system must be designed so that it will not accept a charge for OTC medicines or drugs unless a prescription number is assigned; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a vendor that uses health-related Merchant Codes, all of the following conditions must be satisfied:

  • The vendor must retain records of the purchaser, amount, and date of sale;
  • The vendor must make these records available to the employer on request; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a “90% pharmacy,” the following condition must be satisfied:

  • Substantiation (including a copy of the prescription or other documentation that a prescription has been issued) must be properly submitted in accordance with the terms of the plan with other information from an independent third party that satisfies the requirements of the proposed cafeteria plan regulations.

Note: A pharmacy is a “90% pharmacy” if (i) it maintains no inventory information approval system, and (ii) 90% of the store’s gross receipts in its prior taxable year met the definition of medical care expenses under section 213(d) of the Internal Revenue Code.

When the OTC medicine or drug order is filled by a vendor that is not described above:

  • The vendor may not accept FSA and HRA debit cards to pay for OTC medicines and drugs after January 15, 2011.

IRS Issues New guidance on OTC Medicines and Drugs

Last week, the IRS issued additional guidance related to the new health care reform law and its impact on over-the-counter (OTC) medicines and drugs.

Summary of the new OTC law: The Patient Protection and Affordable Care Act (PPACA), mandates that expenses incurred for OTC medicines and drugs (with the exception of insulin) will not be eligible for reimbursement under a health FSA or HRA unless you have a prescription.

The new OTC law will apply to all purchases made on or after January 1, 2011. The new law will apply to the tax year, not the plan year. This means that even if your plan year starts in November 2010, the rule will still apply to you (and everyone else) beginning January 1 2011. 

Effective January 1, you will no longer be able to use your FSA/HRA debit card to pay for over-the-counter medicines and drugs, and you will need to obtain a prescription in order to receive reimbursement from your HSA/HRA for these items. That means that you will have to pay for these items out-of-pocket, and then file a manual claim along with a prescription in order to be reimbursed from your FSA or HRA.

What is considered an OTC “medicine or drug”? 

The IRS did not provide specific guidance regarding what is to be considered a medicine or drug under this new law. Nevertheless, at this time we can be reasonably certain that certain categories of items will be considered medicines/drugs and therefore will require a prescription effective January 1, 2011 in order to receive reimbursement from an FSA or HRA. These include: allergy and sinus medications; cough, cold and flu medications; digestive aids; pain relievers; sleep aids; and stomach remedies. Please contact your FSA/HRA administrator for a more detailed list. 

The good news is, you will still be able to use your FSA/HRA debit card for many common health care expenses that are not considered OTC medicines and drugs under the new law. These include: Band Aids; diabetic testing and aids; eye care and contact lens supplies; first aid supplies; insulin and diabetic supplies; reading glasses; and thermometers. And remember, regular prescriptions will not be subject to this rule, so you will still be able to pay for your prescription drugs with your FSA/HRA debit card just as you have in the past. You will also be able to use your FSA/HRA debit card for doctor and hospital visits, as well as dental and vision care, provided such items are covered under your plan(s).

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