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IRS Modifies Notice 2010-59 to Allow Debit Card Purchases of OTC Medicines and Drugs

12/23/2010

The IRS released Notice 2011-5 modifying the use of debit cards outlined in Notice 2010-59. After January 15, 2011, health FSA and HRA debit cards may continue to be used to purchase over-the-counter medicines or drugs at drug stores and pharmacies, at non-health care merchants that have pharmacies and at mail order and web-based vendors that sell prescription drugs, if they meet the following requirements:

(1) prior to purchase,

(i) the prescription (as defined in Notice 2010-59) for the over-the-counter medicine or drug is presented (in any format) to the pharmacist;

(ii) the over-the-counter medicine or drug is dispensed by the pharmacist in accordance with applicable law and regulations pertaining to the practice of pharmacy; and

(iii) an Rx number is assigned;

(2) the pharmacy or other vendor retains a record of the Rx number, the name of the purchaser (or the name of the person for whom the prescription applies), and the date and the amount of the purchase in a manner that meets IRS recordkeeping requirements;

(3) all of these records are available to the employer or its agent upon request;

(4) the debit card system will not accept a charge for an over-the-counter medicine or drug unless an Rx number has been assigned; and

(5) the requirements of the guidance referred to in paragraph I.02 of this notice are satisfied. (I.02 states: Additional rules for the use of health FSA or HRA debit cards are set forth in Prop. Treas. Reg. 1.125-6 and in Rev. Rul. 2003-43, 2003-1 C.B. 935; 2 Notice 2006-69, 2006-2 C.B. 107; Notice 2007-2, 2007-1 C.B. 254; and Notice 2008- 104, 2008-2 C.B. 1298.)

If these requirements are met, the debit card transaction will be considered fully substantiated at the time and point-of-sale.

After January 15, 2011, health FSA and HRA debit cards may also continue to be used to purchase over-the-counter medicines or drugs from vendors (other than drug stores and pharmacies, non-health care merchants that have pharmacies, and mail order and web-based vendors that sell prescription drugs) having health care related Merchant Codes, if all requirements above are satisfied, other than the requirements in (1) and (4) above and the requirement in (2) above that a record of the Rx number be retained.

If these requirements are satisfied, these debit card transactions will be considered fully substantiated at the time and point-of-sale.

Health FSA and HRA debit cards may be used to purchase over-the-counter medicines and drugs at "90 percent pharmacies" but only as provided in Notice 2010-59.

For all other providers and merchants, other than those described in this notice, health FSA and HRA debit cards may not be used to purchase over-the-counter medicines or drugs after January 15, 2011.  

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