Latest guidance lifts restrictions on FSA debit card use

For a while, it appeared as though the healthcare reform law had all but killed the option of employees using flexible spending account (FSA) debit cards at large chain drugstores. But now the feds have softened their stance.
Before the reform law was passed, many FSA-type programs were set up to allow health plan participants to use a debit card system to pay for over-the-counter (OTC) meds.
The systems allowed participants to use their account funds like cash without having to submit reimbursement claims.
Then came the healthcare reform law. Under its original regulations, the law not only limited FSA reimbursement to prescribed OTC meds and insulin, it also prohibited the use of debit cards for OTC purchases — unless 90% of the store’s income where the card was used consisted of eligible healthcare expenses.
That pretty much took large chain drugstores out of the debit card equation all together.
New notice, new exceptions
But a new notice (2011-5) from the Internal Revenue Service (IRS) has changed things to give new life to debit cards.
While the rule limiting FSA reimbursement to prescribed OTC meds is still in effect, the IRS has announced that as of Jan. 15, 2011, debit cards may be used to purchase OTC medicines and drugs at any pharmacy — as long as all of the following requirements are met:

  1. Prior to purchase, the prescription for the OTC medicine must be presented to the pharmacist
  2. The medicine must then be dispensed by the pharmacist in accordance with applicable law and regulations
  3. An Rx number must be assigned to the drug and the pharmacy must retain 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 amount of the purchase in a manner that meets IRS recordkeeping requirements
  4. All of the above records must then be available to the employer or its agent upon request
  5. The debit card system must be designed to not accept a charge for an OTC medicine or drug that does not have an Rx number assigned to it, and
  6. The transaction must meet all other rules and guidelines established for debit/credit card purchases under cafeteria plans.

In addition, the notice says plan participants can also be reimbursed for OTC drugs purchased directly from a doctor, without a prescription. All the physician or care provider needs to do is obtain a “health care merchant code” and meet the same requirements listed in points 3, 4 and 6.
While this surely comes as good news for plans that use debit cards, it also creates a slew of new paperwork — as sponsors must now make a significant number of changes to their plan documentation and administration.