How Does the PPACA Impact the Use of FSA Debit Cards?

January 11, 2011 ( – This week, a reader asks about the use of FSA debit cards for over-the-counter purchases in 2011.



The Question:  “If I understand the PPACA regulations correctly, FSA debit cards cannot be used when purchasing OTC drugs and medicines that will require a prescription in order to be considered FSA-eligible.  However, FSA debit cards can still be used to purchase other FSA-eligible OTC products and supplies that do not require a prescription, such as first-aid supplies, insulin and diabetic supplies, bandages, etc.  Is that correct?”

The Response:

As a result of the changes in PPACA, expenses incurred for medicines and drugs may only be reimbursed from an employer-sponsored health plan (including a health flexible spending arrangement (FSA) or health reimbursement account (HRA)) if: (1) the medicine or drug requires a prescription, (2) the medicine or drug is an over-the-counter (OTC) medicine or drug and the participant obtains a prescription, or (3) the medicine or drug is insulin.  Similarly, a distribution from a health savings account (HSA) for a medicine or drug is treated as a tax-free “qualified medical expense” only if one of these three requirements is satisfied.

Last September, the IRS issued Notice 2010-59, which provides generally that effective for expenses incurred on or after a short transition period ending January 15, 2011, FSA and HRA debit cards may not be used to purchase OTC medicines and drugs (except in the case of a “90% pharmacy”).  According to Notice 2010-59, this prohibition was because “[c]urrent debit card systems are not capable of substantiating compliance” with the new requirements. 

Just before the end of last year, the IRS issued Notice 2011-5, which modifies Notice 2010-59 with respect to the use of FSA and HRA debit cards.  Notice 2011-5 provides generally that FSA and HRA debit cards may continue to be used to purchase OTC medicines and drugs at or from certain types of entities so long as certain requirements are satisfied.  For example, Notice 2011-5 provides that FSA and HRA debit cards may continue to be used at drug stores and pharmacies, non-health care merchants that have pharmacies, and at mail order and web-based vendors that sell prescription drugs, if certain requirements are satisfied.  Among other things, the prescription must be presented to a pharmacist, the pharmacist must dispense the medicine or drug in accordance with applicable law and assign an Rx number, the pharmacy must retain records of the Rx number and certain other information and make it available to the employer upon request, and the debit card system must accept OTC medicine or drug charges only if an Rx number has been assigned.  Notice 2011-5 also allows FSA and HRA debit cards to continue to be used to purchase OTC medicines and drugs at other vendors that have health care related Merchant Codes so long as certain requirements are satisfied.

The new OTC drug prescription requirements apply only to OTC medicines and drugs, and do not apply to other OTC items that are not medicines or drugs.  Thus, the new rules will not affect the use of FSA or HRA debit cards to purchase medical equipment such as crutches, medical supplies such as bandages, or diagnostic devices such as blood sugar test kits.  These items will continue to be treated as medical expenses if they satisfy the definition of medical care in Code section 213(d).


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Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm’s Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.