The Affordable Care Act changed the way FSAs, HRAs, MSAs & HSAs handle reimbursement for over-the-counter (OTC) drugs; after December 31, 2010 you can no longer use these accounts to pay for OTC drugs without a prescription. The IRS will only allow prescribed medicines or drugs (including prescribed OTC medicines and drugs) and insulin (even if purchased without a prescription) as qualifying medical expenses subject to preferred tax treatment.
The new rule does not apply to items for medical care that are not medicines or drugs. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, regardless of whether the items are purchased using a prescription.
The key phrase here is without a prescription. If a taxpayer wants to use one of these accounts to pay for OTC medicine, they must have their doctor prescribe it to them, and then the taxpayer must present the prescription to the pharmacist, drugstore, mail order or web-based vendor. The pharmacist must assign the OTC drug a prescription number (Rx).
Then the taxpayer can use a flex plan or health reimbursement arrangement to pay for the prescribed OTC drug; the taxpayer must be sure to keep the documentation that there doctor prescribed this OTC medicine and that the pharmacist issued an Rx with their tax records.
Alternatively the taxpayer can provide the 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) to their HSA or MSA to be reimbursed for the prescribed OTC drugs.
Examples of documentation:
- a customer receipt issued by a pharmacy that reflects the date of sale and the amount of the charge, along with a copy of the prescription;
- a customer receipt that identifies the name of the purchaser (or the name of the person for whom the prescription applies), the date and amount of the purchase and an Rx number.
Even though many employer health plans give employees a grace period after the end of the year to “use up” their FSAs, the rule still applies, all OTC drugs purchased after December 31, 2010 must be prescribed in order to qualify for reimbursement via FSA, HRA, MSA or HSA even if they are paid for using 2010 funds.
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