This is the 16th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This WorkCite deals specifically with IRS Notice 2011-5, which modifies previous IRS guidance that would have barred the use of certain debit cards to pay for expenses incurred for over-the-counter (OTC) medicines and drugs. The rule affects reimbursements under health flexible spending arrangements (health FSAs), and health reimbursement arrangements (HRAs).

Background

Prior to 2011, the cost of OTC medicines and drugs were medical expenses that were eligible for reimbursement from group health plans (and were qualified medical expenses eligible for distribution from HSAs and Archer MSAs). The Act, however, amended the definition of "medical expenses" in the Code for these purposes to permit the reimbursement (and distribution) of funds used to purchase OTC medicine and drugs only where the individual has a prescription or is purchasing insulin.

On September 3, 2010, the IRS issued Notice 2010-59, which provides guidance on the implementation of the new rule. See "McGuireWoods Healthcare Reform Guide: Installment No. 12" for our detailed report on Notice 2010-59. Notice 2010-59 stated that, with few exceptions, health FSA and HRA debit cards could not be used to purchase OTC medicines and drugs on and after January 16, 2011.

Note: The new rule remains inapplicable to OTC items that are not medicines or drugs, including equipment, supplies, and diagnostic devices. These items will continue to qualify if they otherwise meet the definition of "medical care," which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Notice 2011-5

Notice 2011-5 modifies the prior IRS guidance and permits participants to use their health FSA and HRA debit cards to pay for OTC medicines and drugs on and after January 16, 2011, but only in accordance with the following restrictions, which are based on the type of entity selling the medicine or drug.

When the OTC medicine or drug order is sold by a drug store, pharmacy, non-healthcare merchant with a pharmacy, mail-order vendor, or web-based vendor, all of the following conditions must be satisfied:

  • The prescription must be presented to the pharmacist at or before the time of purchase,
  • The OTC medicine or drug must be dispensed by a pharmacist under applicable law;
  • A prescription number must be assigned;
  • The pharmacy or other entity must retain records of the prescription number, purchaser, amount, and date of sale;
  • The pharmacy or other entity must make these records available to the employer on request;
  • The debit card system must be designed so that it will not accept a charge for OTC medicines or drugs unless a prescription number is assigned; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a vendor that uses health-related Merchant Codes, all of the following conditions must be satisfied:

  • The vendor must retain records of the purchaser, amount, and date of sale;
  • The vendor must make these records available to the employer on request; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a "90% pharmacy," the following condition must be satisfied:

  • Substantiation (including a copy of the prescription or other documentation that a prescription has been issued) must be properly submitted in accordance with the terms of the plan with other information from an independent third party that satisfies the requirements of the proposed cafeteria plan regulations.

Note: A pharmacy is a "90% pharmacy" if (i) it maintains no inventory information approval system, and (ii) 90% of the store's gross receipts in its prior taxable year met the definition of medical care expenses under section 213(d) of the Internal Revenue Code.

When the OTC medicine or drug order is filled by a vendor that is not described above:

  • The vendor may not accept FSA and HRA debit cards to pay for OTC medicines and drugs after January 15, 2011.

Comment: In many instances, the cost of acquiring a prescription for an OTC medicine or drug may be far greater than the participant's savings from using his or her health FSA. For example, it would not be cost effective for the plan to pay the $100 cost of a doctor's office visit that is scheduled for the sole purpose of coaxing a prescription for aspirin to ensure reimbursement for its $5 purchase price from the participant's health FSA. To avoid perverse results, plan sponsors might consider eliminating reimbursement for all, or specified, OTC purchases, even where the participant has a prescription, and without regard to the use of debit cards.

Comment: The effective dates of many provisions of the Act have placed tremendous pressure on the IRS and other government agencies to issue guidance on a wide array of rules within a very short period. Notice 2011-5 is another in a growing trend of agency pronouncements relating to the Act that correct positions taken by government agencies in previously issued guidance. In many instances, guidance (e.g., notices and interim final regulations) has been issued without the benefit of public comment, resulting in rules that often do not reflect market conditions or industry practices or with which compliance would be administratively impracticable. While this is inefficient for both employers and the agencies, it underscores the importance of public comment with respect to these changes, even after initial guidance has been issued.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.