The Affordable Care Act changed when health plans and tax-advantaged accounts can pay for over-the-counter (OTC) medicines. The IRS later clarified that debit cards tied to certain employer-sponsored accounts may still be used to buy OTC drugs when those purchases meet specific substantiation rules.
That clarification appears in IRS guidance and describes the procedures vendors and plan administrators should follow so a point-of-sale debit card purchase is treated as fully substantiated.
Prior to purchase
- the prescription for the OTC medicine or drug is presented (in any format) to the pharmacist,
- the OTC medicine or drug is dispensed by the pharmacist in accordance with applicable law and regulations pertaining to the practice of the pharmacy, and
- 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 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 OTC medicine or drug unless an Rx number has been assigned.
5. All other requirements for use of debit cards associated with health plans are followed. When these procedures are met, the card transaction is considered fully substantiated at the point of sale.
Purchases of OTC medicines at vendors with health-care-related merchant codes (for example, hospitals or certain clinics) or at pharmacies that meet a high percentage-of-sales threshold may be subject to a less stringent substantiation process.
For purchases from merchants that sell OTC drugs but do not operate a pharmacy (such as convenience stores), a health-account debit card generally cannot be used to buy OTC medicines unless the merchant and transaction meet the IRS procedures described above.
If you want more detail on card transaction rules and related compliance issues, see Health Care Reform and Credit Card Processing.
For information about account types and eligible expenses, see Flexible Savings Accounts (FSA).
If you have specific questions about whether a purchase will qualify, ask an agent.
Frequently Asked Questions
Can I use my FSA debit card to buy OTC drugs without a prescription?
No. OTC medicines paid with an FSA- or HRA-linked debit card must meet the vendor and recordkeeping procedures that include a prescription and assigned Rx number.
What records must the pharmacy keep?
The pharmacy must retain the Rx number, purchaser name (or patient name), purchase date, and amount in a way that satisfies IRS recordkeeping rules.
Are all stores allowed to accept FSA/HRA debit cards for OTC drugs?
No. Only pharmacies, merchants with pharmacies, mail-order or web vendors that dispense by prescription, and certain health-care merchants may accept the cards under the substantiation rules.
What should I do if a merchant refuses to accept my health-account debit card?
Ask the merchant whether they can follow the required substantiation procedures or use another payment method and retain the prescription and receipt for reimbursement.