IRS Guidance on OTC Drugs

The Internal Revenue Service (IRS) has released Notice 2010-59, guidance and some related questions regarding reimbursement of over-the-counter (OTC) drugs. These new rules are applicable to all health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs). These changes are effective for expenses incurred for OTC medicines or drugs after December 31, 2010. Therefore, only medicines or drugs may be paid or reimbursed by an employer-sponsored plan such as a health FSA, HRA, HAS or Archer MSA if: 1. The medicine or drug requires a prescription. 2. The medicine or drug is available without a prescription and the individual obtains a prescription, or; 3. The medicine or drug is insulin. When determining which rules apply to medicines and drugs, consider the incurred date. The changes do not affect purchases of OTC medicines and drugs in 2010, even if they are reimbursed after December 31, 2010. The effective date applies regardless of whether the plan year is a fiscal year or a calendar year, and regardless of any grace period for a health FSA. For purposes of this new restriction, the IRS defines "prescription" as a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state. The new restrictions do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. The IRS also noted that most debit card systems are not capable of substantiating compliance with the new rules. If the plan reimburses expenses for OTC medicines and drugs, then one can seek reimbursement for these expenses by presenting a prescription (or a copy of the prescription or another item showing that a prescription for the item has been issued) and the customer receipt (or similar third-party documentation showing the date of the sale and the amount of the charge). Further information regarding these new regulations can be found at:,,id=227308,00.html The necessary plan amendment will be forthcoming. In the meantime, if you have any