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Get ready for FSA changes: IRS issues regs for 2011 OTC drug reimbursements

If you have a flexible spending account, or plan to sign up for one in the workplace benefits enrollment season that will soon be here, remember that medical flexible spending accounts face a change in 2011.

With such an account, usually referred to as an FSA, you can contribute money directly from your paycheck and then use the FSA funds later to pay for eligible medical expenses that aren't covered by your insurance. These also save you some tax money, since your paycheck contributions are made before your payroll taxes are calculated.

 In 2003, the IRS made FSAs even more appealing by letting account owners use the money to pay for over-the-counter, or OTC, medications. This option made it even easier to avoid losing FSA money. If leave any cash in your FSA at the end of the benefit year (or the grace period if you company offers it), you lose that case. 

By letting folks buy OTC items off store shelves, they were able to spend down every last FSA dollar.

The new health care reform act, however, changes that.

OTC drugs are still FSA reimbursable expenses, but beginning in 2011 that applies only if the medications are prescribed by a doctor. I guess that sort of make them quasi-prescription meds.

Doctor writing a prescription

In Notice 2010-59, Guidance on Changes to Rules for Reimbursement of Over-the-Counter Drug Expenses, the IRS has officially announced that FSA funds can be used to pay for medicines or drugs only if:

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

So if you have a terrible cold and want NyQuil, you'll have to get it in formal writing that your doctor said you should guzzle the stuff or your FSA administrator won't give you the money for it.

OTC overkill: The IRS regs also discuss how to substantiate your OTC purchases for FSA purposes.

Under the new rule, before an FSA administrator can reimburse you an over-the-counter medicine or drug purchases, you must provide the prescription (or a copy of the prescription or other documentation that a prescription has been issued) for the medicine, along with "other information from an independent third party that satisfies the requirements."  This includes:

  • A customer receipt issued by a pharmacy which identifies the name of the purchaser or the name of the person for whom the prescription applies, or
  • The date and amount of the purchase and an Rx number satisfies the substantiation requirements for over-the-counter medicines or drugs, or
  • A receipt without an Rx number accompanied by a copy of the related prescription.

I have a few concerns here.

You're probably going to have to make an appointment to get the prescription for the OTC treatment.

That means you'll be out another co-pay or deductible amount for an added office visit. At least you can use your FSA to pay for that.

But isn't that added use of your insurance going to mean that its cost, to you and your employer, is going to go up, too?

Some transition leeway: The IRS is offering some leeway for folks to get used to the new rule, which also will apply to Health Savings Accounts (HSAs) associated with high-deductible health plans and Archer Medical Savings Accounts (Archer MSAs).

First, don't panic now. The new prescription-required standard applies only to purchases made on or after Jan. 1, 2011. So I suggest buying up as much still FSA-OK OTC items as you can this year with your workplace account funds.

Also, some things still will be treated as they are now.

As noted earlier, insulin is excepted. So are eye glasses and contact lenses, as well as medical devices, such as crutches, bandages and diagnostic items items like blood sugar test kits or blood pressure reading equipment.

These and similar items remain eligible as FSA reimbursable medical care as long as they meet the tax definition of medical care, which is "expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body."

However, expenses for items that are merely beneficial to the general health of an individual, such as an expenditure for a vacation or vitamins, have never been classified as FSA-eligible and remain on the no-reimbursement list.

Debit card difficulties: Finally, note that if you've been using a debit card for FSA or HSA expenses, they won't be as handy next year.

These pieces of plastic aren't set up to comply with the OTC Rx requirement that goes into effect next year. Basically, the card systems are incapable of recognizing and substantiating that the medicines or drugs were prescribed.

Therefore, says the IRS, you can't use health account debit cards to purchase over-the-counter medicines or drugs. You can, though, continue to use your medical debit card for other allowable medical expenses.

So if you have an FSA, HSA or MSA or plan to open one in 2011, make sure you take into account the tougher reimbursement rules as you make your employer-provided health care benefit decisions.

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Valerie, I agree with you. The change making it harder to use FSA money to buy OTC meds is stupid. But I fear it's here to stay. The change was part of the health care reform law and for some reason Congress decided nickel and diming medical reimbursement accounts was a good way to pay for part of the new law. In 2013, medical FSAs also will be limited to $2,500. I'll have to track down exactly how much previously tax-free money the OTC Rx change and coming account limit have saved/are projected to raise, but I can't believe it's that much. But it was an easy target to slip in. Sorry. Write/call your Representative and Senators. Kay


Is there any hope that this requirement for a doctor's Rx will be overturned? This month alone I've spent over $60 on female contraception available OTC. Am I really supposed to go to a doc each time, which will add a $25 co-pay to my expense? Does the gov't know how hard it is to schedule an appointment with a doctor?

All this is asinine!

At the end of the day, it is MY money in the FSA account. I really wish I knew the logic behind these IRS changes.

kathlynn huff

If you have Fibromyalgia and a jacuzzi helps reduce the pain and Dr approves the thearpy, can you purchase a jaccuzi with your fsa


So how can the rules change on 1/1/11 right in the middle of the plan year? Open enrollment is in May. Do the rules that were in place when the plan year started stay active?

Gob Bluth

Everyone wants something for nothing. Maybe you all should lead healthier lives to begin with.


Just the government getting its greedy little paws into places that shouldn't concern them. But, remember folks you voted for these financially illiterate idots. Once a tax is in place it never gets removed.



Larry Stevens

This sucks all the way - the first real tax savings for the middle class is taken from us. Just more of the same gov BS - the gov needs to learn to live within its means and stop raising taxes. This action amount to a massive tax increase. Maybe Obama and Congress should be forced to live on a middle class wage for 5 years and see if they come away with such a bright and enlightened idea...

Betty Lubovich

I plan on loading up on the over the counter products I most frequently buy before they become ineligible! I found a cool site too called FSAStore.com, they only sell FSA eligible products.

joe a

just another reason the govt should have never have passed this insane health care reform bill. This is just the first step and it will get so much worse for working people.


Joe, I think that Bandaids etc. might be OK -- or might be specifically exempted when final regs are issued.

Personally, I think Congress should have had the guts to say no OTC whatsoever. This is just confusing, adding to the anger that FSA etc. users will feel when they try to claim some things and are rejected. If they just knew it was no more, they'd get mad and then get over it.


This really hurts the folk that need it most. In effect, it's a pure take-away, as who will actually waste the time and money to get a doctor to write a prescription for cough medicine?
Items like Band-Aids and the selection of OTC Family planning is off the list as well I'd imagine. Or do the regs waive the Doc's orders for these?

Toni McIntyre

It sounds like all you have to do is get your Dr to write a prescription for all your OTCs. I would think most Drs would.


Melissa here from Midyear Tax Tip #2 and again, I'm sending a huge thank you for showcasing this information. I knew of some of the changes but not this and this is HUGE. With 3 children (including a very active 7 yr old boy), I purchase quite a bit of OTC meds: menstrual pain relief, bandaids, benadryl, cold medication, cuts and scrapes care, sinus relief (lots in the spring) heck, even cotton balls (who knew?). Your point of a Dr.'s RX is dead on. My company recently changed our co-pay to a co-share system where we now pay 20% of the visit which can easily exceed the previous $15 co pay. I can't afford that. This is for sure a What Were They Thinking moment and here I was concerned about the amount changing in 2013.


Nice article. Keep writing. Its informative & has updated my knowledge. No plastic money is only the cause of worry. But saving taxes matters a lot.

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