Putney, Twombly, Hall & Hirson LLP
521 Fifth Avenue
New York, NY 10175
Tel: (212) 682-0020


December 30, 2010

Change in Reimbursement Rule for Over-the-Counter Medicines and Drugs

The Patient Protection and Affordable Care Act (PPACA), enacted on March 23, 2010, set a new standard for the use of tax favored employer health plans such as health flexible spending accounts established under cafeteria plans (health FSAs) and health reimbursement accounts (HRAs).  Similar rules will go into effect on January 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Effective January 1, 2011 (regardless of plan year) expenses for over-the-counter (OTC) medicines and drugs cannot be reimbursed from such accounts, unless a prescription is obtained.  This new law applies only to medicine and drugs and does not affect the reimbursement of expenses for medical devices such as bandages, hearing aids, wheel chairs, glasses, co-pays and deductibles, if the plan provides for such reimbursement. Insulin is excepted, and may continue to be reimbursed, even if no prescription is obtained. 

It is important to note that even if a medicine or drug is available OTC without a prescription, it may be reimbursed after January 1, 2011 if a prescription is obtained for it.  As long as the OTC medicine or drug was purchased in 2010, it can be reimbursed in 2011.

Use of Debit Cards for Health FSAs and HSAs

Many employers have issued debit cards to employees to facilitate employees’ access to their health FSAs and HRAs.  Such cards provide no ability to confirm that OTC medicine and drugs are purchased with a prescription as required in order to permit reimbursement after January 1, 2011. 

Because of changes that will need to be enacted to existing debit card systems, the IRS has announced in Notice 2011-5 that a brief extension will be granted to users of health FSA and HRA debit cards so that the new rules for OTC medical and drug purchases will not apply to debit card users until January 15, 2011.  After January 15, 2011, Notice 2011-5 continues to allow the use of debit cards to purchase prescribed OTC medicine and drugs, provided that the purchase is made from a pharmacy, a vendor that is authorized to issue an Rx number, or a facility that has an IRS-issued “Health Care” Merchant Code.  

Health FSAs must be amended by June 30, 2011 to reflect this change in the law.

* * *

If you have any questions regarding these PPACA mandated changes, please do not hesitate to contact us.