Exec Summary - OTC

New OTC Rules for HSAs, HRAs, and FSAs Prescribed Drugs or Insulin


New OTC Rules for HSAs, HRAs, and FSAs Prescribed Drugs or Insulin


Who:               Taxpayers with Flexible Spending Accounts, Health Reimbursement Accounts, and Health Savings Accounts used to purchase over-the-counter (OTC) medicines.

When:             Effective tax years beginning after December 31, 2010.

Executive Summary:  Many plans provide a debit card to pay for medications, including over-the-counter medications.  As part of their insurance plans, families can use HSA, HRA, and FSA accounts to purchase OTC medications to treat specific conditions..

Effective January 1, 2011 an OTC drugs, medicines, and biologicals need a doctor’s prescription to be defined as a qualified medical expense (QME) eligible for reimbursement against HSAs, HRAs, and FSAs, even if it is otherwise available without a prescription. In addition, effective Jan. 1, 2011, the excise tax for using HSA funds for non-qualified medical or other expenses increases from 10 percent to 20 percent.

Action Required: Most employers will want to discuss the new legislation with their benefit consultant. Depending upon your plan’s interpretation of the new law, the following are examples that may require a doctor's prescription in order to be an eligible expense:

Acid controllers                                              Digestive aids      

Allergy and sinus                                           Feminine anti-fungal and anti-itch

Antibiotic products                                       Hemorrhoid preps

Anti-diarrheal                                                 Laxatives

Anti-gas                                                           Motion sickness

Anti-itch and insect bite                               Pain relief

Anti-parasitic treatments                             Respiratory treatments

Baby rash ointments and creams              Sleep aids and sedatives

Cold sore remedies                                        Stomach remedies

This change affects only OTC drugs, medicines a  nd biologicals. Bandages, home health-aids and other OTC items may still be eligible and can be purchased using HSA funds without further documentation. The following are examples of some of the items that may remain available without a physician prescription:

Artificial teeth                                               Elastic bandages and wraps

Band-Aids®                                                                 First aid supplies

Birth control                                                 Hearing aids and batteries

Braces and supports                                     Insulin and diabetic supplies

Braille books and magazines                         Ostomy products

Catheters                                                     Oxygen and oxygen-equipment

Contact lens supplies and solutions                Pregnancy test kits

Denture adhesives                                         Reading glasses

Diagnostic tests and monitors                        Wheelchairs, walkers and canes


For more information on qualified medical expense see IRS bulletin 502 at http://www.irs.gov/pub/irs-pdf/p502.pdf 

 Additional Issues to Consider:

1.      Plan Members, pharmacists, and the family doctor may be confused by the new restrictive rules requiring a “prescription for non-prescription medications.”

2.      Pharmacists and checkout clerks will not be able to over-ride the card processing system.   

3.      Plan members may need to go to the doctor’s office to get a prescription for the OTC medication.  

4.      With new exposure to liability, they may need to see the patient before prescribing anything. 

5.      Additional office visits and follow up visits may be generated.  

6.      To avoid calls, confusion, and assure insurance coverage physicians may begin prescribing stronger “real” prescription drugs. 

7.      Drug card vendors will be changing their cards to deny coverage for OTC medications.


The information presented and contained within this article was submitted by Ronald E. Bachman, President & CEO of Healthcare Visions This information is general information only, and does not, and is not intended to constitute legal advice. You should consult your legal advisors to determine the laws and regulations impacting your business.