FSA and HRA Alert for 2011: Tougher to Get Reimbursed for OTC Meds

If you use a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) to pay for run of the mill over-the-counter drugs, health care reform is about to make that process a bit harder.

Beginning January 1, 2011 any OTC drug purchase can be reimbursed only if you've obtained a prescription for it. Yes, that is a bit oxymoronic; you will indeed need a doctor's prescription for an OTC medication if you want to pay for it with tax-free dollars you stuffed in your FSA/HRA. And if you've been enjoying the convenience of using an FSA debit card to streamline your OTC drug purchases, well, you might need to kiss that goodbye as well. In many instances consumers will be required to shell out after-tax dollars from their wallet to cover a drug purchase and then submit the receipt, with companion prescription, for reimbursement. The only workaround to that inconvenience is to stick with a drugstore that derives at least 90 percent of its gross receipts from medicine purchases. According to the new law they are the only drug dispensers who will be able to accept FSA debit-cards for drug purchases. Not exactly great news if you currently use Costco/ Walmart/Target as your pharmacy.

As annoying as that will be for consumers, I can just imagine how warmly this is going to be received in doctors' offices around the country. Come January 1, 2011 they will start to field prescription requests for such basic medicine-cabinet staples as Claritin, Benadryl, Robitussin and Prilosec OTC to name just a few.

Given that this is federal legislation, there are of course all sorts of caveats and loopholes. A detailed explanation is available at the IRS website. Here are some of the headliner items to be aware of:

This only impacts medications. Crutches, Band-Aids, condoms and other medical goods covered by your plan will not require a prescription.
The debit-card ban applies only to drug purchases. You can continue to use a debit card for non-medicine purchases covered by your plan.
Insulin is exempt. In case I'm not the only one who wasn't aware of this: some types of insulin do not require a prescription. Those drugs will continue to be reimbursable without a prescription
Even if you are allowed to file 2010 claims into early 2011, the new rules apply. Any drug purchase you might make after January 1, 2011 to "use up" your remaining leftover FSA funds from 2010 will need to have that doctor's note. The one caveat here is that debit-card drug purchases made until January 15, 2011 will not need a prescription. That's an IRS bone to help "merchants" adjust to the new system.
The IRS is watching. If you somehow manage to use FSA money without following the new rules, the amount of the disbursement will lose its tax-break and will be added to your gross income. You could also be slapped with a penalty of up to 20 percent of the disbursement.

While the new rules don't prohibit using your FSA/HRA for any expense currently covered, it sure does make for a less convenient process. If you have a chunk of money in your 2010 FSA you might want to hustle to get it spent before the end of the year, just to avoid the paperwork hassle for claims sent in after Jan 1, 2011. And when you're making your 2011 FSA election, just be aware that you're going to have to work a little bit harder starting next year to take advantage of using tax-free dollars to pay for your meds.

Photo courtesy of Flickr user swanksalot

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