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January 10, 2011

HRB 30 - Limited Relief for Debit Card Purchases of OTC Medications

Released January 10, 2011I Download as a PDF

January 10, 2011 --  As part of the Patient Protection and Affordable Care Act, over-the-counter (OTC) medications, excluding insulin, cannot be reimbursed from medical spending accounts, such as flexible medical spending accounts, health reimbursement arrangements, or health savings accounts, unless a prescription for the OTC medication has been issued.  Medical supplies, such as crutches, band-aids, or blood sugar test kits, can continue to be reimbursed from medical spending accounts, without a prescription.  According to IRS Notice 2010-59, after January 15, 2011, debit cards can no longer be used for the purchase of these items, given the complexity of proving (substantiating) the prescription (see Over-the-Counter Medication Prohibition Clarified)

More recently, the IRS issued Notice 2011-5 and FAQs, somewhat tempering the prior Ruling.  According to this Notice, after January 15, 2011, health FSA and HRA debit cards may continue to be used to purchase OTC medications at drug stores and pharmacies, at non-health care merchants that have pharmacies, and at mail order and web-based vendors that sell prescription drugs, if, prior to purchase:

  1. The prescription for the OTC medication is presented, in any format, to the pharmacist; and such medication is duly dispensed by a licensed pharmacist, together with an assigned Rx number.  The pharmacy or vendor retains a record that includes the Rx number, the name of the purchaser or individual to whom the medication is prescribed, and the date and amount of the purchase;
  2. The records are available to the employer or its agent upon request; and
  3. The debit card system does not accept a charge for an OTC medication unless an Rx number has been assigned.

If the above requirements are met, the debit card transaction will be considered fully substantiated at the time and point-of-sale.

If the OTC medication is purchased from a vendor that has a health care related merchant code, debit card transactions will be considered fully substantiated at the time and point-of-sale, as long as:

  1. The pharmacy or vendor retains a record that includes the Rx number, the name of the purchaser or individual to whom the medication is prescribed, and the date and amount of the purchase; and
  2. The records are available to the employer or its agent upon request.

Health FSA and HRA debit cards may be used to purchase OTC medications at so-called, “90% Pharmacies”, as long as the expenses are properly substantiated.  A 90% pharmacy is an entity that does not maintain an inventory information approval system, and 90% of its gross receipts during the prior taxable year are derived from qualifying medical expenses.

A debit card cannot be used for the purchase of OTC medication from any facility other than those described above.

This should come as welcome relief to plans that have endorsed the use of debit cards in their account-based plans.  These rules notwithstanding, some employers may wish to exclude OTC medications altogether from their health spending account plans, given the potential increase in cost that may occur from employees seeking prescriptions for such medications. 

 

 

About the Author:  Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc.  She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.  Ms. McLeese is based in the CBIZ Leawood, Kansas office.

 

 

The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. This information is not intended to replace or substitute for accounting or other professional advice. You must consult your own attorney or tax advisor for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein. As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

 

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