New IRS guidance allows continued use of FSA/HRA debit cards to pay for OTCs

Basic tax code changes still require approved OTC purchases by prescription only

WASHINGTON — Though most might associate the Internal Revenue Service with the Grinch, the IRS came through with a last-minute Christmas present for retailers stung by changes in the tax code related to consumers’ use of flexible spending and health reimbursement accounts to purchase approved OTC products.

The new guidance, issued Dec. 23, enables consumers to continue using FSA and HRA debit cards to pay for prescribed OTC products. The move comes as particularly good news to pharmacy retailers, most of which — more than 90% of the industry — had invested millions of dollars to convert POS systems in recent years to accept the special FSA and HRA debit cards.

In line with the Affordable Care Act, as of Jan. 1, 2011, consumers enrolled in FSA and HRA programs no longer can use those tax-exempt dollars to pay for OTC purchases without a written prescription. While retailer POS systems still could physically accept the cards, there was no way for those systems to identify an actual prescription drug purchase from a prescribed OTC.

According to the new guidance, which becomes effective after Jan. 15, 2011, “this use of debit cards must comply with procedures reflecting those that pharmacies currently follow when selling prescribed medicines or drugs. The procedures include requirements that a prescription for the medication be presented to the pharmacy or the mail-order or Web-based vendor that dispenses the medication and that proper records be retained,” the IRS noted.

While the new guidance on debit card usage comes as some good news to pharmacy retailers and consumers enrolled in FSA and HRA programs, many continue to rail against the basic tax code changes for OTCs and FSA/HRA programs. Opponents believe the shift could have the opposite effect of lowering the cost of health care, adding hundreds of millions of dollars in additional costs for otherwise unnecessary primary care visits — to acquire prescriptions — and lost productivity due to rising presenteeism/absenteeism.

Still, the news that consumers will be able to continue to use their FSA/HRA debit cards to pay for prescribed OTCs comes at least as a partial victory for consumers and retailers who had been burned by the changes in the tax code.

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