• IRS Will Permit Debit Cards to be Used for Purchase of Prescribed OTC Drugs
  • December 30, 2010 | Author: Mary V. Bauman
  • Law Firm: Miller Johnson - Grand Rapids Office
  • The IRS just announced it will permit the use of debit cards in connection with an FSA, HRA or HSA for the purchase of prescribed over-the-counter (OTC) drugs. Formerly, debit cards for these tax-free accounts could reimburse OTC drug expenses. However, Health Care Reform tightened the rules and only allows OTC drugs to qualify as an eligible expense under an FSA, HRA or HSA after 2010 where the OTC drug is prescribed or is insulin.

    In September 2010, the IRS issued Notice 2010-59 indicating that debit cards could not be used to purchase OTC drugs after January 15, 2011 in order to comply with Health Care Reform. However, the IRS recognized an exception in the case of certain pharmacies without an Inventory Information Approval System (IIAS) where at least 90 percent of the store’s gross receipts consist of medical care items as defined under Section 213(d) of the Internal Revenue Code.

    On December 27, 2010, the IRS released Notice 2011-5 which modifies its earlier notice. Under the new Notice, debit cards may be used at all pharmacies and vendors for the purchase of prescribed OTC drugs after January 15, 2011 where certain requirements are satisfied. These requirements are similar to the procedures pharmacies and other vendors must follow when selling prescription drugs.