IRS Issues Guidance on FSA and HRA Debit Cards for OTC Drugs

As of Jan. 1, 2011, employees are no longer 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 without a prescription

By Stephen Miller Dec 29, 2010

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.

New Procedures

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:

. Bandages
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.

Related Articles:

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

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page

Sign up for SHRM’s free Compensation & Benefits e-newsletter


Job Finder

Find an HR Job Near You
Post a Job

HR Professional Development Education in a City Near You

SHRM Seminars are coming to cities across the US this fall.

Find a Seminar


Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect