IRS Releases Additional Guidance on "Over the Counter" Restrictions

Back before the Patient Protection and Affordable Care Act was passed, most flexible spending accounts provided for reimbursement of "over-the-counter" medicine and drugs. Many FSA programs began using the "debit card" system that allowed participants to use their accounts like cash without having to actually pay and submit reimbursement claims. Along came PPACA, which limit OTC reimbursement to insulin, medicines and drug with a physician prescription and medical care items like bandages, blood sugar testing kits and crutches. IRS Notice 2010-59 was issued that prohibited the use of debit card reimbursement for OTC purchases after January 15, 2011 (unless from a pharmacy which had 90% of its gross receipts for qualifying medical care expenses under Code Section 213(d). For practical purposes, that pretty much eliminated the ability to use debit cards at any large chain drugstore. But now, things have changed a little bit. The IRS issued Notice 2011-5 which provides for a couple of new exceptions to the OTC debit card purchase restriction. The first "new" exception is that participants can make purchases from drug stores, pharmacies and non-health care merchants that have pharmacies, and also mail order and web-based sellers of prescription drugs using their debit cards if all of the following requirements are met: The participant has a prescription for the OTC drug and gives it to the pharmacist, who assign is an Rx number in accordance with applicable laws; The vendor keeps a record of the prescription Rx number, purchaser, date of purchase and amount in a manner that satisfies IRS record keeping requirements; The vendor makes records available to the employer if requested; The debit card system is designed so that it will not accept a charge for OTC unless an Rx number has been assigned; and The transaction meets any other rules or guidelines established for debit or credit card purchases for cafeteria plans. Sounds confusing but you can bet most stores with pharmacies will make sure they comply. Still, the participant has to have a prescription. The second "new" exception is that a debit card can be used to purchase OTC drugs and medicines at health-care merchants (like physicians or vision care providers) provided the health-care merchant has obtained a "health care merchant code" and also meets the same requirements listed in points 2,3 and 5 above. (recording purchase, reporting and satisfying other requirements). However, there is no prescription requirement and there is no Rx number requirements. So it looks like you can but OTC drugs from your doctor or eye doctor without having to get a prescription. So take these two exceptions, coupled with the "90% Pharmacy" exception, and debit cards can be used for OTC reimbursement more that was originally thought when PPACA passed. Still, it is a considerable amount of change that plan sponsors have to incorporate into their cafeteria plan administration and documentation. If you have any questions about administration of your cafeteria plan or debit card program, please contact your attorney at Fox Rothschild for more information.

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