January 10, 2011
IRS Modifies Rules on Paying for Over-the-Counter Medications with Debit Cards
Effective January 1, 2011, the Affordable Care Act1 requires that individuals obtain a prescription for over-the-counter (OTC) medicines and drugs (other than insulin) in order to receive reimbursement for the cost of the medicine from a health plan. The Internal Revenue Service (IRS) issued Notice 2010-59 in November 2010, which prohibited plans from allowing a health Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) debit card to pay for OTC medicines and drugs, even if the individual has obtained a prescription for the drug.2 The IRS allowed for a two-week transition period (from January 1-15, 2011) during which debit cards could be used to purchase OTC drugs, in order to allow debit-card systems to be re-programmed.
On December 23, 2010, the IRS issued Notice 2011-53 and accompanying answers to frequently asked questions (FAQs),4 which reversed its position on the use of debit cards to purchase OTC medicines and drugs for which the individual has a prescription. Now, as of January 16, 2011, under certain conditions, health FSA and HRA debit cards may continue to be used to purchase OTC medicines or drugs at the following businesses: pharmacies, drug stores and grocery stores if those stores have pharmacies, and mail-order and Web-based vendors that sell prescription drugs.5
Conditions for Using Debit Cards to Purchase OTC Medicines or Drugs
If the following conditions are satisfied, the debit-card transaction will be considered fully substantiated at the time and point of sale:
- Prior to purchase, the prescription must be presented to the pharmacist (in any format), who then dispenses the drug in accordance with applicable law and assigns an Rx number to the transaction.
- The pharmacy or other vendor must retain a record of the Rx number, the name of the purchaser or patient, and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements.
- All of these records must be available to the employer or its agent upon request.
- The debit-card system must not accept a charge for an OTC medicine or drug unless an Rx number has been assigned.
- All other IRS rules regarding substantiation of debit-card transactions must be met.6
Using Debit Cards to Purchase OTC Medicines or Drugs from Certain Vendors without Pharmacies
Notice 2011-5 also permits health FSA and HRA debit cards to be used to purchase OTC medicines or drugs from other vendors (without pharmacies) if the vendor has health-care-related "Merchant Codes." This could include businesses such as a physician's office or hospital. In this case, the transaction would be considered fully substantiated at the time and point of sale if the following conditions are met:
- The vendor must retain a record of the prescription.
- All debit-card rules must be met.
- The records must be available to the employer or its agent upon request.
Where Debit Cards Cannot Be Used
Debit cards cannot be used to purchase OTC medicines and drugs at businesses that do not meet the standards in the IRS Notices. This would include convenience stores or grocery stores that do not have a pharmacy.
Using Debit Cards for Other Medical Items
Regardless of the location of the purchase, debit cards can continue to be used for medical care items that are not medicines or drugs. This includes equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood-sugar test kits.
Plan Sponsor Implications
Plan sponsors may face challenges with debit-card administration in light of the fact that the prescription rule is new, and the implementation rules have been revised just before the beginning of the plan year. Plan sponsors with debit cards should ask their card providers for clear, easy-to-understand instructions for their participants, and assure that participants have access to the rules as soon after January 1, 2011 as possible.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on the interpretation and application of the Affordable Care Act and related regulations. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues.
- The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
- Notice 2010-59 was discussed in Sibson's December 9, 2010 Capital Checkup, "New Rules on Paying for Over-the-Counter Medications." (Return to the Capital Checkup.)
- The Notice 2011-5 is on the IRS Web site. (Return to the Capital Checkup.)
- The answers to these FAQs are on the IRS Web site. (Return to the Capital Checkup.)
- Notice 2011-5 does not change the rules that apply when debit cards are used to purchase OTC medicines or drugs at pharmacies known as "90 percent" pharmacies. These are generally small pharmacies where 90 percent of the gross receipts consists of items that qualify as medical care expenses. As described in Notice 2010-59, the use of debit cards at these pharmacies will require follow-up submission of the claim to the plan by the participant. (Return to the Capital Checkup.)
- These rules are discussed in Sibson's August 2006 Bulletin, "Debit Card Use Expanded to Medical, Dependent Care Claims" (Return to the Capital Checkup.)
Capital Checkup is Sibson Consulting's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.