FSA can't reimburse OTC drugs without prescription: IRS

WASHINGTON—Employees who want to pay for over-the-counter medications using their health care flexible spending account will need a prescription to do so effective Jan. 1, 2011, according to new Internal Revenue Service rules.

The rules issued Friday involve a section of the health care reform law that sharply restricts FSA reimbursements for OTC medications such as nonprescription pain relievers, cold medicines, antacids and allergy medications.

What was not clear, though, was, for example, whether a doctor’s note was enough or whether a prescription was required for an FSA to reimburse OTC purchases, said Sharon Cohen, an attorney with Towers Watson & Co. in Arlington, Va.

In the notice, the IRS says a prescription is required for OTC reimbursements. It defines a 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 a medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.”

The IRS also resolved uncertainty involving the new OTC restriction on what are known as “grace period” FSAs. Under rules the IRS issued in 2005, unused contributions made to FSAs in the current year can be rolled over to pay for expenses incurred during the first 2½ months in the following year. The new IRS rules say OTC reimbursements are banned for grace-period FSAs and FSAs without grace periods effective Jan. 1, 2011, said Mark Berggren, benefits outsourcing counsel with Hewitt Associates Inc. in Lincolnshire, Ill.

It isn’t known what percent of expenses reimbursed through FSAs involve OTC medications.

In 2010, an average of 20% of eligible employees made FSA contributions, according to Hewitt Associates, while contributions averaged $1,535 per employee among employers with at least 500 workers in 2009, according to Mercer L.L.C. in New York.

The health care reform law’s restrictions on reimbursing OTC expenses from FSAs is the first of two major provisions affecting FSAs to take effect. The other provision will cap pretax contributions to FSAs at $2,500 effective Jan. 1, 2013.

Under prior law, there was no annual limit on FSA contributions, though employers typically imposed annual limits ranging from $4,000 to $5,000.

Congress imposed the new limits to raise revenue to help pay for other provisions in the reform law that will expand coverage, such as new federal insurance premium subsidies for the lower-income uninsured, beginning in 2014.