Prior to 2011, the cost of over-the-counter (OTC) medications and drugs was deemed to be a medical expense eligible for taxfree reimbursement under employersponsored health plans, including a flexible spending arrangement (FSA) or health reimbursement arrangement (HRA). That changed when the Patient Protection and Affordable Care Act of 2010 redefined “medical expenses” to include only those OTC medicines and drugs for which the individual has a prescription and insulin.
This past September, the IRS issued Notice 2010-59 with additional guidance for implementation of the new rule. Among other things, that Notice defines “prescription,” for this purpose, as “a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.” In addition, the Notice provides that effective for expenses incurred after January 15, 2011, FSA and HRA debit cards may not be used to purchase OTC medicines and drugs because current debit card systems are “incapable of recognizing and substantiating that the medicines or drugs were prescribed.” On December 23, 2010, the IRS issued Notice 2011-5, modifying that earlier guidance and reinstating the permitted use of debit cards to pay for OTC medications and drugs from certain types of vendors, subject to very specific restrictions.
Importantly, after January 15, 2011, FSA and HRA debit cards may be used to purchase OTC medications or drugs at drug stores and pharmacies, at non-health care merchants that have pharmacies and through mail order and web-based vendors that sell prescription drugs, if (1) prior to purchase, the prescription is presented to the pharmacist and the pharmacist dispenses the OTC medication in accordance with applicable law and assigns an Rx number; (2) the pharmacy retains a record of the Rx number, the name of the purchaser and the date and amount of the purchase and does so in a manner that meets IRS recordkeeping requirements; (3) the pharmacy makes these records available to the employer upon request; (4) the debit card system is designed so that it will not charge for OTC medications or drugs unless an Rx number has been assigned, and (5) the other existing rules applicable to the use of debit cards are satisfied. Notice 2011-5 also permits the use of FSA and HRA debit cards for the purchase of OTC drugs from other vendors that use health-related merchant codes, as long as the vendor retains records of the purchaser, as well as of the date and the amount of the purchase, makes these records available the employer on request and otherwise satisfies existing rules applicable to the use of debit cards.