The IRS has reversed its position on using debit cards with your Flexible Savings Account (FSA) or Health Reimbursement Arrangement (HRA) to pay for prescribed over-the-counter medicine or drug. Late last year, the government agency said, “no debit cards.” Now, as of January 16, 2011 you can use your debit card–under certain conditions.
Ouch. It’s the phrase, “under certain conditions” that’s giving me a headache.
According to the consultants at Segal & Company, “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.”
Here are the main conditions: :
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.
Still, it’s good that the IRS changed course with debit cards.
In late December, the IRS issued a notice and accompanying answers to frequently asked questions, reversing its position on the use of debit cards to purchase over-the-counter medicines or drugs for which the individual has a prescription.
As of January 16, 2010, under certain conditions, Health FSA and HRA debit cards may continue to be used to purchase over-the-counter medicines or drugs
at pharmacies and drugstores and grocery stores that have pharmacies and from mail-order and Web-based vendors.
RS 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.
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