Reimbursement Rules for Over-the-Counter Medicines

How does the Patient Protection and Affordable Care Act (PPACA) change the rules for reimbursing over-the-counter medicine and drug costs from employer-sponsored health accounts, such as Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs)?
Beginning January 1, 2011, FSA and HRA distributions can only be used to reimburse the cost of over-the-counter medicines purchased with a prescription. However, reimbursements for insulin purchased with or without a prescription will still be permitted.
How will the new reimbursement rules apply to distributions from Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs)?
The PPACA states that only prescribed medicines, including over-the-counter medications purchased with a prescription and insulin purchased with or without a prescription, will be regarded as qualifying medical expenses subject to preferred tax treatment.
When will the reimbursement changes become effective?
After December 31, 2010, over-the-counter medicines purchased without a prescription will be subject to the reimbursement changes. Please note that the changes will not affect purchases of over-the-counter medications for 2010, even if these purchases are reimbursed after December 31, 2010.
Does this change apply to over-the-counter medical devices and supplies?
No. This change does not affect items used for medical care that are not medicines. Costs for equipment, supplies, and diagnostic devices purchased without a prescription after December 31, 2010, will still qualify for reimbursement under FSAs or HRAs, and will remain tax-free under HSAs and Archer MSAs.
Are prescriptions required in order to use FSA, HRA, HSA, or Archer MSA funds for insulin purchases
after December 31, 2010?
No. Funds from these accounts can continue to be used to purchase insulin without a prescription
after December 31, 2010.
Can FSA, HRA, HSA, or Archer MSA funds still be used to reimburse copayment and deductible expenses after December 31, 2010?
Yes. Copayment and deductible expenses will remain reimbursable from FSAs and HRAs, and distributions from HSAs and Archer MSAs will continue to be tax-free after December 31, 2010.
If a claim for over-the-counter medicines purchased in 2010 is submitted after December 31, 2010, do the expenses still qualify for reimbursement?
Yes. The new reimbursement rule only applies to the purchase of over-the-counter medications without a prescription occurring after December 31, 2010.
If an employer-sponsored account, such as an FSA, includes a grace period extending into 2011, will purchases of over-the-counter medicines without a prescription made during the grace period remain reimbursable?
No. The reimbursement change applies to purchases made on or after January 1, 2011. Over-the-counter medicines purchased without a prescription during 2011 will not be eligible for reimbursement through the employer-sponsored account, regardless of any grace period.
What proof is required for reimbursement of over-the-counter medications purchased with a prescription?
In order to have over-the-counter medicine costs reimbursed through an employer-sponsored FSA or HRA, members must provide (a) the prescription, a copy of the prescription, or an item showing that a prescription for the item has been issued, and (b) a customer receipt or similar third-party documentation showing the date of sale and charge amount. Examples of a qualifying proof of prescription purchase include:
- A customer receipt issued by a pharmacy that shows the date of sale and charge amount, along with a copy of the prescription
- A customer receipt that shows the name of the purchaser/person to whom the prescription applies, the date of sale, charge amount, and an Rx number
Can plan-issued debit or credit cards be used to purchase over-the-counter medicines after December 31, 2010?
Generally, no. Such cards should be reprogrammed no later than January 1, 2011 so that they may no longer be used to purchase over-the-counter medications.¹ In order to receive reimbursement for over-the-counter medication, members will need to submit documented proof of their prescription purchases.

1. For more information, see the IRS Notice 2010-59.
If members use HSA or Archer MSA funds to reimburse the cost of over-the-counter medications purchased without a prescription after December 31, 2010, what taxes will they incur?
The HSA or Archer MSA distribution amount for expenses that do not qualify as medical expenses will be included in a member's gross income and subject to an additional tax of 20 percent.

This information is provided for informational purposes only and does not constitute legal advice. Please consult your legal counsel regarding your specific situation.

Please note that this content is only intended to describe national health care reform requirements under the Patient Protection and Affordable Care Act (PPACA). It does not address Massachusetts law requirements or the potential impact of Massachusetts law on federal PPACA requirements.

For purposes of PPACA implementation, Blue Cross Blue Shield of Massachusetts assumes the plan year is the policy year, unless an account notifies us otherwise.