Over The Counter Drugs & Debit Cards FAQs
IRS Q&As on OTC Drugs and Debit Cards
The Affordable Care Act (ACA) changed the rules for reimbursement of over-the-counter (OTC) medicines and drugs through plans such as health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs) and health savings accounts (HSAs). Effective January 1, 2011, OTC medicines and drugs (except insulin) may only be reimbursed with a prescription.
The Internal Revenue Service (IRS) issued guidance in Notice 2010-59 and Notice 2011-5 regarding the use of health FSA and HRA debit cards for OTC medicines and drugs. This guidance limited the use of health FSA and HRA debit cards for OTC drug purchases after January 15, 2011.
The IRS also issued guidance in the form of Questions and Answers (Q&As) to help individuals understand the new rules for reimbursement of OTC medicines and drugs.
This Legislative Brief summarizes the IRS guidance regarding the use of debit cards for OTC medicines and drugs and contains the IRS’ Q&As.
IRS Notices
IRS Notice 2011-5 modified the guidance found in IRS Notice 2010-59, which stated that health FSA and HRA debit cards may not be used after January 15, 2011, except at certain pharmacies. Under IRS Notice 2011-5, individuals can continue using health FSA and HRA debit cards to purchase OTC medicines for drugs for which they have a prescription.
Effective after January 15, 2011, health FSA and HRA debit cards may continue to be used 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, the prescription for the OTC medicine or drug is presented to the pharmacist, the OTC medicine or drug is properly dispensed by the pharmacist and a prescription number is assigned;
- The pharmacy or other vendor retains a record of the prescription number, the name of the purchaser and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements;
- All of these records are available to the employer or its agent upon request;
- The debit card system will not accept a charge for an OTC medicine or drug unless a prescription number has been assigned; and
- All other rules related to the use of health FSA and HRA debit cards are satisfied.
Health FSA and HRA debit cards may also continue to be used for OTC medicine or drug purchases from health care providers other than pharmacies and mail order and web-based vendors, if:
- The vendor has a health-care related Merchant Code (for example, a physician or hospital);
- The vendor retains the name of the purchaser and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements;
- All of these records are available to the employer or its agent upon request; and
- All other rules related to the use of health FSA and HRA debit cards are satisfied.
IRS Q&As
Q: How are the rules changing for reimbursing the cost of over-the-counter medicines and drugs from health FSAs and HRAs?
A: Section 9003 of the Affordable Care Act established a new uniform standard for medical expenses. Effective January 1, 2011, distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted, even if purchased without a prescription.
Q: How are the rules changing for distributions from HSAs and Archer medical savings accounts (Archer MSAs) that are used to reimburse the cost of over-the-counter medicines and drugs?
A: In accordance with Section 9003 of the Affordable Care Act, only prescribed medicines or drugs (including over-the-counter medicines and drugs that are prescribed) and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment.
Q: When will the changes become effective?
A: The changes are effective for purchases of over-the-counter medicines and drugs without a prescription after Dec. 31, 2010. The changes do not affect purchases of over-the-counter medicines and drugs in 2010, even if they are reimbursed after Dec. 31, 2010.
Q: How do I prove that I have purchased an over-the-counter medicine or drug with a prescription so that I can get reimbursed from my employer's health FSA or an HRA?
A: If your employer’s health FSA or HRA reimburses these expenses, you would provide the prescription (or a copy of the prescription, or another item showing that a prescription for the item has been issued) 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; or it could consist of 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.
Q: How does this change affect over-the-counter medical devices and supplies?
A: The rule does not apply to items for medical care that are not medicines or drugs. 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 are purchased using a prescription.
Q: Will I need a prescription to use my health FSA, HRA, HSA or Archer MSA funds for insulin purchases after Dec. 31, 2010?
A: No. You can continue to use your health FSA, HRA, HSA or Archer MSA funds to purchase insulin without a prescription after Dec. 31, 2010.
Q: I use health FSA funds for my copays and deductibles. Will I still be able to reimburse those expenses with health FSA funds after Dec. 31, 2010?
A: Yes. Copays and deductibles 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.
Q: My company gives me two extra months beyond the end of the year to submit claims for health FSA expenses incurred during the year. What happens if I purchase over-the-counter medicines or drugs without a prescription in 2010 but do not submit the claim for those expenses until January 2011? Will they qualify for reimbursement?
A: Yes. The new restriction on plan reimbursements for the cost of over-the-counter medicines or drugs without a prescription applies only to purchases that are made after 2010.
Q: My company’s health FSA includes a provision for a grace period, so that if I don’t spend all of the money in my health FSA by Dec. 31 in a given year, I can still use the amount left in my health FSA at the end of the year to reimburse expenses I incur during the first 2 ½ months of the following year. If I buy over-the-counter medicines or drugs without a prescription during the 2 ½ month grace period of 2011, can I still use the amount left in my health FSA at the end of 2010 to reimburse those expenses?
A: No. The change applies to purchases made on or after January 1, 2011. Thus, even if your employer’s plan includes the 2 ½ month grace period provision, the cost of over-the-counter medicines and drugs purchased without a prescription during the first 2 ½ months of 2011 will not be eligible to be reimbursed by a health FSA.
Q: If my health FSA or HRA issues a debit card that I use to pay for over-the-counter medicines or drugs, will I still be able to use the card to purchase over-the-counter medicines or drugs after Dec. 31, 2010?
A: Generally, yes, if you have a prescription for the medicine or drug. For expenses incurred in 2010, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs (whether or not you have a prescription) at pharmacies and from mail order and web-based vendors that sell prescription drugs. Starting after January 15, 2011, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs at these vendors, so long as you obtain a prescription for the medicine or drug, the prescription is presented to the pharmacist, and the medication is dispensed by the pharmacist and given an Rx number.
For further information, including guidance on purchases of over-the-counter medicines and drugs from health care providers other than pharmacies and mail order and web-based vendors (such as physicians or hospitals), see IRS Notice 2011-5. For guidance on debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59.
Q: ACA removed over-the-counter medicines and drugs from the list of reimbursable qualified medical items if purchased without a prescription. If you have an HSA, Archer MSA, health FSA, or HRA, how will the change in the law affect reporting on Form W-2? Do the reimbursements for items that are not qualified medical expenses need to be included as taxable wages on employees’ Forms W-2?
A: If you have an HSA or an Archer MSA, distributions for expenses that are not qualifying medical expenses (including over-the-counter medicines and drugs purchased without a prescription) will be included in your gross income and subject to an additional tax of 20%. The income tax and additional tax are reported on Form 8889 for an HSA distribution and on Form 8853 for an Archer MSA distribution. You complete these forms and attach them to your Form 1040 when you file your income tax return. Distributions from an HSA or an Archer MSA are not included as taxable wages and do not affect your Form W-2.
Source: Internal Revenue Service
