IRS Publishes New Health Care Reimbursement Guidance

September 3, 2010 ( – The Internal Revenue Service (IRS) has issued some new guidance on provisions added by the Patient Protection and Affordable Care Act.


The IRS said that Notice 2010-59 provides guidance on new section 106(f) of the Internal Revenue Code, added by section 9003 of the Affordable Care Act.  That section sets forth a new standard, effective January 1, 2011, for reimbursement of expenses for over-the-counter drugs from all workplace health plans, including:

  • flexible spending arrangements (FSA),
  • health reimbursement arrangements (HRA),
  • Health Savings Accounts (HSA) and
  • Archer Medical Savings Accounts (Archer MSA).

Section 106 is the section of the Internal Revenue Code that provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan, while Section 105(b) generally provides that the gross income of an employee does not include amounts paid as reimbursements for medical care under an employer-provided accident or health plan.

New Sections

The new § 106(f), as added by the Affordable Care Act, provides that, for purposes of §§ 106 and 105, beginning after December 31, 2010, expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Thus, under new § 106(f), expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including a health FSA or HRA, only if:

  1. the medicine or drug requires a prescription,
  2. is available without a prescription (an over-the-counter medicine or drug) and the individual obtains a prescription, or
  3. is insulin.

The IRS noted that, as a result of new section 106(f), the cost of over-the-counter medicines cannot be reimbursed from any of these tax-free arrangements unless the medicine is prescribed – a standard the IRS said applies to purchases made on January 1, 2011, or later -- even if the funds were set aside in 2010.  The notice also notes that expenses incurred for over-the-counter medicines or drugs purchased without a prescription before January 1, 2011 may be reimbursed tax-free at any time, pursuant to the terms of the employer’s plan.

 The IRS also noted that Revenue Ruling 2010-23 is also being released that obsoletes Rev. Rul. 2003-102, prior guidance on reimbursing expenses for over-the-counter drugs from employer health plans.

Notice 2010-59 and Revenue Ruling 2010-23 will appear in IRB 2010-39, dated September 27, 2010, according to the IRS. 

Notice 2010-59 is online at

Revenue Ruling 2010-23 is available at