The IRS recently issued Notice 2011-5 to permit the use of debit cards to pay for prescribed over-the-counter (OTC) medicines under medical flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs). This notice modifies previous IRS guidance that would have barred the use of debit cards for OTC medicines.
As background, the Patient Protection and Affordable Care Act changed the definition of medical expenses that are eligible for reimbursement by FSAs and HRAs. Since December 31, 2010, OTC medicines no longer qualify as medical expenses unless they are insulin or are prescribed. On September 3, 2010, the IRS issued Notice 2010-59, which states that health FSA and HRA debit cards could not be used to purchase OTC medicines and drugs on and after January 16, 2011. This rule does not apply to OTC items such as equipment, supplies and diagnostic devices as long as they meet the definition of medical care.
IRS Notice 2011-5 modifies the government's earlier position and allows FSA and HRA debit cards to be used after January 15, 2011 to purchase prescribed OTC medicines if certain requirements are met. The purchases can be made by debit card and are considered fully substantiated at pharmacies and mail-order or Web-based vendors that sell prescription drugs if the participant presents a prescription for the OTC medicine and a prescription number is assigned. In other words, the procedure for purchasing OTC medications with debit cards should reflect the procedure that pharmacies currently follow when selling prescribed medicines.