The IRS has announced that beginning with expenses incurred on and after January 1, 2011, health FSA and HRA debit cards may not be used to purchase over-the-counter (OTC) medicines or drugs.
What's the reason for this change? According to IRS Notice 2010-59, it relates to changes made to the FSA rules under the Affordable Care Act. You'll recall that under the Act, the cost of an OTC medicine or drug can't be reimbursed from an FSA or similar account unless a prescription is obtained.
Unfortunately, current debit card systems can't ensure compliance with this new requirement, because the systems aren't capable of recognizing that the medicines or drugs in question are authorized by a prescription.
The IRS is providing a bit of wiggle room: it will not challenge the use of FSA debit cards for OTC expenses through January 15, 2011. This is intended to help facilitate making the necessary changes to existing systems. On and after January 16, 2011, though, OTC medicine or drug purchases at all providers and merchants (whether or not they have an inventory information approval system) must be substantiated before reimbursement may be made.
So, how can these expenses be substantiated for reimbursement from an FSA? The IRS offers a couple of examples. First, a customer receipt issued by a pharmacy that identifies: (1) the name of the purchaser (or the name of the person for whom the prescription applies), (2) the date and amount of the purchase and (3) an Rx number satisfies the substantiation requirements for OTC medicines or drugs. Second, a receipt without an Rx number accompanied by a copy of the latest related prescription also satisfies the requirements.