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IRS Expands Use of Debit Card for OTC Drugs


On Thursday, December 23, 2010, the IRS issued Notice 2011-5, which clarifies the rules for when a Health FSA or Health Reimbursement Arrangement (HRA) may reimburse prescribed over-the-counter (OTC) medicine or drugs.

Under the health care reform law called the Affordable Care Act (ACA), OTC drugs require a prescription if incurred on or after January 1, 2011. Previously, Notice 2010-59 delayed the effective date to January 16, 2011, for purchases made with debit cards.

Notice 2011-5 provides a further exception for debit cards, outlining a procedure where a prescribed OTC drug could be reimbursed through a debit card if the all five of the following requirements are met:

  • Before the purchase, the FSA/HRA participant gives the pharmacist a copy of the prescription, the pharmacist provides the OTC drug and assigns an Rx number
  • The pharmacy or other vendor retains a record of the Rx number, the name of the purchaser or person for whom the prescription applies, and the date and amount of the purchase
  • The pharmacy retains all records for review by the employer or its agent upon request
  • The card will not work without an assigned Rx number
  • All of the other usual requirements are met

The above requirements must be met for the following types of vendors:

  • Drug stores and pharmacies
  • Non-health care merchants with pharmacies (e.g., Walmart)
  • Mail order and web-based vendors that sell prescription drugs

The card could also be used at other vendors with a health care-related Merchant Category Code, except the requirements above related to an Rx number do not apply because no pharmacy is involved.

If all of the above requirements are met, the purchase will be considered fully substantiated at the point of sale. Notice 2011-5 states that the rules for debit card purchases at “90 percent pharmacies” continue to be subject to the ACA rules in Notice 2010-59, which was issued earlier in 2010.

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