For OTC—IRS Offers New Guidance on FSA and HRA Debit Cards

By Ric Joyner

We have asked our Attorney in DC to answer some questions regarding this notice. This notice assists with the use of debit cards because our industry was concerned with how to treat OTC when using debit cards after 1-1-11. In other words, were TPAs required to turn off the debit card for OTC? And how would we do that with current technology without affecting other purchases? The process could require turning off the card at the merchant level which is the pharmacy! Thus, no purchases at the pharmacy were allowed and employees were faced with sending in manual receipts for all claims at pharmacies. Without this guidance the debit card industry was frozen on how to handle debit cards after January 1, 2011. Would the card still work? How will the debit card vendor be selective between OTC and a prescribed drug? As a TPA we were considering hiring more staff to handle the angry phone calls when the cards wouldn’t work at the pharmacy for legitimate purchases as the debit card vendors sorted out this problem for OTC and prescribed drugs. In my initial analysis, it appears the card will still work on 1-1 with eflex treating the OTC like any other prescribed medication. The debit card would allow the purchase to go through for prescribed OTC and we would use our TPA software to go into automatic mode to ask the participant for the prescription for the OTC medication. This essentially is no different than how we currently treat prescribed medications.

We will create new notices for employees on how best use the debit card with OTC in the coming days.

HSAs are left out of the notice because the individual is responsible for the claim versus FSAs and HRAs, which are “group” plans, and thus the employer is responsible.

Insulin does not require a prescription to be reimbursed.

The IRS Notice is as follows. Please note my comments in blue.

IRS Offers New Guidance on FSA and HRA Debit Cards

WASHINGTON — The Internal Revenue Service today issued new guidance allowing the continued use of health flexible spending arrangement (FSA) and health reimbursement arrangement (HRA) debit cards for the purchase of prescribed over-the-counter medicines and drugs.

The new guidance modifies previous guidance to permit taxpayers to continue using FSA and HRA debit cards to purchase over-the-counter medications for which the taxpayer has a prescription. Effective after Jan. 15, 2011, in accordance with the new guidance, this use of debit cards must comply with procedures reflecting those that pharmacies currently follow when selling prescribed medicines or drugs.

The procedures include requirements that a prescription for the medication be presented to the pharmacy or the mail-order or web-based vendor that dispenses the medication and that proper records be retained.

In accordance with the Affordable Care Act, the cost of over-the-counter medicines or drugs can be reimbursed from a health FSA or HRA if a prescription has been obtained. The requirement to obtain a prescription does not apply to insulin.

The prescription requirement applies to purchases made on or after Jan. 1, 2011, and not to purchases made in 2010 even if reimbursed after Dec. 31, 2010. Because the requirement applies only to over-the-counter medications, it does not apply to other health care expenses such as medical devices, eye glasses or contact lenses. These items were not affected by the new health care law and were still reimbursable for OTC with the debit card.

The new guidance, IRS Notice 2011-5, as well as answers to frequently asked questions on, also contain further details on health FSA and HRA debit card purchases, including purchases from health care providers other than pharmacies and mail order and web-based vendors.

For guidance on health FSA and HRA debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59. More information on health care reform provisions can be found on the Affordable Care Act page on