IRS Announces Rules for Reimbursement of OTC Drugs from HSAs and FSAs
Reimbursement of ‘Prescription’ OTC Drugs from an FSA or HSA
The IRS recently clarified questions regarding reimbursement of over-the-counter (OTC) drugs from an individual’s health flexible spending account (FSA) or health savings account (HSA).
The Affordable Care Act (ACA) of 2010 mandates that, effective 01/01/2011, OTC drugs must have a doctor’s prescription to be eligible for reimbursement from an individual’s FSA or HSA. That prescription requirement has not changed, but IRS Notice 2011-5 provides additional information with specific steps individuals must take for OTC drugs to be eligible for reimbursement:
An individual acquires a prescription for their OTC drug from a doctor
The prescription is presented to a pharmacist (either as a written prescription or electronically transmitted from the doctor’s office)
The OTC drug is run through the pharmacy system and assigned an Rx #
The individual either a) pays for the OTC drug out of pocket and later receives reimbursement from their FSA or HSA; or b) pays for the OTC drug at the point-of-sale using their FSA or HSA debit card
FSA and HSA Debit Cards May Still Be Used to Purchase Prescription OTC Drugs
IRS Notice 2010-59 previously stated that debit cards could not be used to purchase any OTC drugs after 01/15/11. Federal regulators were concerned that debit cards tethered to HSAs and FSAs would not be capable of distinguishing OTC drugs that had a prescription from those that did not.
With the procedural steps clarified in IRS Notice 2011-5, any reimbursable OTC drug must now be run through the pharmacy system and have an Rx number assigned, creating a ‘substantiated’ expense that satisfies IRS requirements for appropriate use of debit cards for an HSA or FSA.