Flexible Spending Accounts: IRS Issues Rules on Over-the-Counter Purchases

Claims for nonprescription drugs bought in 2010 can be reimbursed in 2011

By Stephen Miller Sep 11, 2010

On Sept. 3, 2010, the U.S. Internal Revenue Service (IRS) issued guidance to reflect the prohibition on the use of flexible spending accounts (FSAs) to pay for over-the-counter medicines and drugs beginning in 2011, as required under the health care reform overhaul. Details on the new rules are provided in IRS Notice 2010-59, IRS Revenue Ruling 2010-23 and related questions and answers, all posted on the IRS web site.

The Patient Protection and Affordable Care Act, enacted in March 2010, established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of over-the-counter medicines or drugs cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

According to the IRS:

  • The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.
  • A similar rule goes into effect on Jan. 1, 2011 for health savings accounts (HSAs) and to remaining Archer medical savings accounts (Archer MSAs), which were a precursor to HSAs. "Employers and employees should consider these changes as they make health benefit decisions for 2011," the IRS advises.

Nondrug Medical Purchases

The new rules do not apply to items for medical care that are not medicines or drugs, the IRS clarified. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, regardless of whether the items were purchased using a prescription.

Co-Pays and Deductibles

Health insurance co-payments and deductibles will continue to be reimbursable from a health FSA after Dec. 31, 2010. Similarly, funds from an HRA can continue to be used for these expenses, and a distribution from an HSA or Archer MSA for these purposes will be tax-free.

Verifying Prescription Purchases

To be reimbursed for prescription purchases under their employer's health FSA or HRA, employees must provide the prescription or a copy and the customer receipt (or similar third-party documentation showing the date of the sale and the amount of the charge). For example, documentation could consist of:

  • A customer receipt issued by a pharmacy that reflects the date of sale and the amount of the charge, along with a copy of the prescription.
  • A customer receipt that identifies the name of the purchaser (or the name of the person for whom the prescription applies), the date and amount of the purchase and an Rx number.

Grace Period

Some health FSAs include a provision for a grace period, so that if employees don't spend all of the money in their health FSA by Dec. 31 in a given year, they can use the amount left in the account to reimburse expenses incurred during the first 2½ months of the following year. However, if employees buy over-the-counter medicines or drugs without a prescription during the 2½-month grace period of 2011, they cannot use the amount left in the account at the end of 2010 to reimburse those expenses, according to the IRS, because the new standard applies to all purchases made on or after Jan. 1, 2011.

FSA Debit and Credit Card Purchases

For plans that issue account-based debit or credit cards, employees generally will not be able to use the cards to buy over the counter medicines or drugs after Dec. 31, 2010. The IRS advises that "plans must ensure that the card is reprogrammed no later than Jan. 15, 2011, so that the card can no longer be used to purchase over-the-counter medicines or drugs."

Stephen Milleris an online editor/manager for SHRM.

Related Article—SHRM:

Health Care Reform’s Impact on Flexible Benefits, SHRM Online Legal Affairs, May 2010

FSA Changes Bring Communications Challenges, HR News, April 2010

Related Article—External:

IRS Issues Additional Guidance on Prohibition of Reimbursement for OTC Drugs and Medications, Ford & Harrison LLP, September 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page


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