IRS Guidance on Over-the-Counter Drug Reimbursements

The new restrictions apply to expenses incurred after December 31, 2010, regardless of when the plan’s plan year, fiscal year or other coverage period occurs. Conversely, that also means plans may continue to reimburse OTC medicine and drug expenses incurred before January 1, 2011, even if the reimbursement occurs after January 1, 2011. However, a health FSA that provides for a two and a half month “grace period” after December 31, 2010 for participants to use up their account balance may not reimburse prescription-less OTC drug purchases made during the grace period.

Health FSAs and HRAs debit cards may not be used for OTC drug purchases under the new rules. To allow time for reprogramming of cards, however, the IRS will allow purchases using debit cards through January 15, 2011. After that date, OTC medicine and drug purchases must be substantiated by submission of a prescription or a customer receipt with a prescription from an independent third party (such as a pharmacy) before reimbursement.

Cafeteria plans that currently provide for reimbursement of OTC drugs and medicine will need to be amended to reflect the new rules. Generally amendments may be prospective only, but the IRS is allowing cafeteria plans until June 30, 2011 to adopt amendments consistent with these restrictions, and to apply them retroactively to OTC expenses incurred after December 31, 2010.

Nancy Ober authored this entry.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.