The Internal Revenue Service on Dec. 23, 2010, issued IRS Notice 2011-5 allowing the continued use of health flexible spending account (FSA) and health reimbursement arrangement (HRA) debit cards to buy over-the-counter (OTC) medicines and drugs for which the consumer has obtained a prescription.
The guidance does not address health savings account (HSA) debit cards, in part because FSA and HRA purchases must be substantiated at the point of sale while HSA purchases are self-substantiated, with documentation saved by the purchaser and presented in the event of an IRS audit; inappropriate or "nonqualified" HSA distributions would then be subject to income tax plus a 20 percent penalty.
However, the accompanying frequently asked questions issued by the IRS note that under the Patient Protection and Affordable Care Act "only prescribed medicines or drugs…and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment" for FSAs, HRAs and HSAs.
Effective Jan. 16, 2011, in accordance with the guidance, the use of FSA and HRA debit cards to purchase OTC medications must comply with procedures reflecting those that pharmacies (as well as mail-order and web-based vendors) follow when selling prescribed medicines or drugs. These include requirements that:
• Prior to purchase, the prescription for the OTC medicine or drug is presented to the pharmacist or other authorized vendor.
• The OTC medicine or drug is dispensed in accordance with applicable law and regulations.
• The debit card system does not accept a charge for an OTC medicine or drug unless an Rx number has been assigned.
• The pharmacy or other vendor retains a record of the prescription number, the name of the purchaser (or the name of the person for whom the prescription applies), and the date and amount of the purchase.
• All of these records are available to the employer or its agent on request.
If all requirements are met, the debit card transaction will be considered fully substantiated at the time and point of sale.
In addition, the guidance clarifies that:
• The prescription requirement applies to OTC medicine and drug purchases made on or after Jan. 1, 2011, and not to purchases made in 2010 even if reimbursed after Dec. 31, 2010.
(As noted above, Jan. 16, 2010 is the date on which FSA and HRA debit card over-the-counter purchases must comply with all point of sale substantiation procedures.)
• The requirement applies only to OTC medications. It does not apply to other health care expenses such as medical devices, eyeglasses and contact lenses.
Prescription or Not?
Starting Jan. 1, 2011, employees will no longer be able to use their flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) or health savings accounts (HSAs) to pay for over the counter (OTC) medications at a pharmacy, supermarket or other retail store without a prescription.
Examples of OTC items that require a prescription for debit card purchases as of Jan. 1, 2011:
. Acid controllers
. Acne medicine
. Aids for indigestion
. Allergy and sinus medicine
. Anti-diarrhea medicine
. Baby rash ointment
. Cold and flu medicine
. Eye drops
. Feminine anti-fungal or anti-itch products
. Hemorrhoid treatment
. Laxatives or stool softeners
. Lice treatments
. Motion sickness medicines
. Nasal sprays or drops
. Ointments for cuts, burns or rashes
. Pain relievers, such as aspirin or ibuprofen
. Sleep aids
. Stomach remedies
Examples of OTC items that may continue to be purchased without a prescription:
. Birth control
. Braces and supports
. Contact lens solution and supplies
. Denture cleaners and adhesives
. Diagnostic tests and monitors (such as blood glucose monitors)
. Elastic bandages and wraps
. First-aid supplies
. Ostomy products
. Reading glasses
.Walkers, wheelchairs and canes
Stephen Miller is an online editor/manager for SHRM.
Unpopular Over-the-Counter Exclusion Under Health Care Reform, SHRM Online Legal Issues, November 2010
Health Care Reform Impacts Over-the-Counter Drugs, SHRM Online Benefits Discipline, October 2010
FSA Changes Bring Communications Challenges, HR News, April 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page